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This paper analyzes the joint effect of EPL and financial market imperfections on investment, capital-labor substitution, labor productivity and job reallocation in a cross-country framework. In the spirit of Rajan and Zingales (1998) and Ciccone and Papaioannou (2006), the authors exploit variation in the need for reallocation at the sectoral and aggregate level to assess the average effect of EPL on firms' policies. Then, exploiting firm-level information they study if the effect of EPL is stronger in firms with lower levels of internal resources. They find that, on average, EPL reduces investment per worker, capital per worker and value added per worker in high reallocation sectors relative to low reallocation sectors.
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