The influence that Spanish Labour Reform represents on Madrid Stock Market: An empirical analysis

Abstract

Empirical evidence for Spanish Stock Market shows that labour events, like a firm level collective agreement, have informative content for the market due to the loss of wealth that it implies for the investor. Labour Reforms which Spain experienced between the years 2010 and 2012 have allowed the jeopardising of employment and the destruction of jobs, substituting one well paid by another of lower cost for the firm, the cost of dismissal, or the proposals of substituting payoffs by the so-called Austrian backpack, and the elimination of the distinction between temporary and permanent contracts. These Labour Reforms affect many of the accounting and financial variables, which are the subject of analysis and followup by investors and analysts, next to the idiosyncrasy of the Open Shop System that is followed in Spain, the present article means to explore the effect on Madrid Stock Market. Our results, applying analysis techniques with decision trees where we control the effect of the economic crisis on the market reaction, show that the Labour Reforms of 2010 to 2012 are incorporated as negative, or positive, information when the investor perceives a possible decrease, or increase, in its future cash flows.