Corporate governance and labor investment efficiency: International evidence from board reforms

Abstract

Research Question/Issue: This study investigates whether and how board reforms affect labor investment efficiency using a difference-in-differences analysis of board reforms in 41 countries worldwide as an exogenous shock.Research Findings/Insights: Board reforms are positively associated with labor investment efficiency because they benefit firms in reducing over-hiring, under-firing, under-hiring, and over-firing. Further, we show that the positive effect is more pronounced among firms with lower board independence before the reforms, firms with high institutional foreign ownership, firms with higher corporate social responsibility (CSR), and labor-intensive firms. While countries with rule-based reforms experience a greater reduction in abnormal net hiring post-reform, the effects of reforms are similar across civil and common law countries. Further analyses reveal that in countries with higher employment protection legislation, the beneficial relationship between board reforms and labor investment efficiency is weaker.Theoretical/Academic Implications: Our study suggests that one of the mechanisms linking board reforms and labor investment efficiency is a reduction in frictions, such as moral hazard and adverse selection, which hamper efficient labor investment. To the best of our knowledge, this is the first international study that explores globally the relationship between board reforms and firm labor policies, in particular, labor investment efficiency.Practitioner/Policy Implications: Given the importance of identifying and confirming the role of corporate governance in human capital investment efficiency, our empirical investigation provides useful insights and policy implications for managers in building efficient labor policies.

Assessing the impact of corporate environmental performance on efficiency improvement in labor investment

“…At the regional level, corporate labor decisions are influenced by factors such as regional economic development and business environment. To control for these influences, we follow Le and Tran (2022) to include GDP per capita ( PerGDP ) and the regional marketization index ( MIndex ) in our model. GDP per capita is a measure of the economic development of a region and is calculated as the natural logarithm of GDP per capita.…”

“…We posit that ESG performance leads to more efficient investments in labor by mitigating market frictions that stem from information asymmetry between managers and outside capital suppliers. Prior literature shows that agency costs may lead self-interested managers to engage in overhiring or retaining employees associated with underperforming projects (Le & Tran, 2022). Underinvestment in labor could also occur if, for example, information asymmetry between managers and investors creates an adverse selection in the timing of securities offerings (Ghaly et al, 2020).…”

No place like home: Do local CEOs invest in labor more efficiently?

“…To measure investments in labor, we use firms' net hiring, which is the change in their number of employees from year t‐1 to t (Pinnuck & Lillis, 2007). Following prior literature (Ben‐Nasr & Alshwer, 2016; Jung et al, 2014; Khedmati et al, 2020; Le & Tran, 2022), we use abnormal net hiring to proxy for labor investment efficiency, which is the absolute value of the difference between the observed and expected net hiring. We obtain the absolute value of the residuals from Model 1 as abnormal net hiring, and it is an inverse measure of labor investment efficiency.…”

“…Second, our paper contributes to the labor investment literature by showing CEO locality, as an intrinsic yet underexplored noncontractual factor, for labor investment. Previous studies find that accounting disclosure‐related issues (Ha & Feng, 2018; Jung et al, 2014), investors' behavior (Ben‐Nasr & Alshwer, 2016; Ee et al, 2022; Ghaly et al, 2020), employee treatment and protection (Cao & Rees, 2020; Guo et al, 2021), executive compensation (Sualihu et al, 2021), corporate governance (Le & Tran, 2022), and various outside factors (e.g., Boubaker et al, 2022; Ding et al, 2021; Luo et al, 2020) can have a significant impact on labor investment. As for executives‐related factors, CEO‐director ties (Khedmati et al, 2020), executives' equity compensation (Sualihu et al, 2021), and CEO overconfidence (Lai et al, 2021) can also affect labor investments.…”

The effect of board effectiveness on the long-term company success and comparability of financial information

“…The market value ratio to the company's equity's book value at the end of the fiscal year. This variable also added to control firms' market value's impact on performance (Le and Tran, 2022) 7…”