Institutional investors' horizons and corporate employment decisions

Short selling and labor investment efficiency: evidence from the Chinese stock market

“…Our tests are threefold. First, in view of the threat of short selling, prior studies indicate that short sellers are more likely to target firms with high levels of asymmetric information, i.e., that are more opaque (Goldstein and Guembel, 2008;Karpoff and Lou, 2010). Additionally, pertinent to the situation of overinvestment in labor, Almazan et al (2017) suggest that the incentives to convey information to stakeholders should be stronger for more opaque firms, where major stakeholders are less informed about the firm's future prospects.…”

“…Indeed, we document that the effect of short selling concentrates in younger firms. Third, as labor investments are typically characterized by significant managerial private information and high information asymmetry (Ghaly et al, 2020), we hypothesize and test that some efficient governance mechanisms may constrain managers' ability to make inefficient labor decisions. Under stronger governance, managers are more likely to behave on behalf of shareholders' interests and have less space to over-hire employees to run non-profitable projects or excessively lay off employees and miss investment opportunities (Khedmati et al, 2019).…”

“…We employ two measures of corporate governance. The first is ownership by dedicated institutional investors, calculated as the sum of the fractions of shares held by mutual funds, QFII, and social insurance funds (Ni and Zhu, 2018), because dedicated institutional investors are long‐term oriented and more incentivized to effectively monitor firms (Bushee, 1998; Ghaly et al ., 2020). The second is ownership by the largest shareholder.…”

“…On the other hand, short selling may reduce the efficiency of labor investments for at least two reasons. First, short sellers can bring about excessive stock price declines, making stakeholders (e.g., creditors, customers, workers) or other counterparties lose confidence in a firm and stop dealing with it (Goldstein and Guembel, 2008;Khanna and Mathews, 2012). According to the top-down theory of capital budgeting of Almazan et al (2017), facing downward price pressures, firms can choose to overinvest in labor to convey favorable information (i.e., signal better firm prospects) to stakeholders (especially workers) who receive a share of the output, encouraging them to expend more efforts to increase the likelihood of the firm's success.…”

Competitive pressure and firm investment efficiency: Evidence from corporate employment decisions

“…According to agency theory, such a divergence of interests is considered the major cause of inefficient management behaviour, which can take the form of empire‐building through overinvestment or effort aversion through underinvestment (e.g., Jensen & Meckling, 1976; Jensen, 1986). Specifically, firm overinvestment in labour is reflected in either overhiring by expanding the number of staff beyond its optimal level or underfiring by retaining an unproductive workforce (e.g., Ghaly et al, 2020). Underinvestment in labour can also be caused by manager preference for the ‘quiet life’ and reluctance to expand investment in labour (Bertrand & Mullainathan, 2003), which results in an underhiring or overfiring problem.…”