This article reveals the existence of a strong negative relationship between employment laws and the financial leverage of firms. Our study uses a large sample of listed firms from the 21 high-income OECD countries. Our hypothesis is that employment laws have an impact on labor-market rigidity and therefore the cost structure of firms. This increased rigidity translates into higher operational leverage for firms, enticing them to decrease their financial leverage. Results are robust to the introduction of several institutional variables used in the literature, in particular the laws protecting unions, minority shareholders and creditors.