Do political connection disruptions increase labor costs in a government-dominated market? Evidence from publicly listed companies in China

Chunyan Wei, Shiyang Hu and Feng Chen

Journal of Corporate Finance, 2020, vol. 62, issue C

Abstract: This paper investigates whether the disruption of political connections increases labor costs among Chinese listed firms. Using the Communist Party of China's Rule No. 18 as an exogenous shock that forces firms to lose their politically connected independent directors, we find that the disruption of political connections is associated with an increase in labor costs (both in terms of aggregate labor costs per firm and average labor costs per employee) and an increase in employee turnover. Such increases do not lead to labor productivity improvements, and cannot be attributed to changes in corporate policies or the composition of labor forces after Rule No. 18. We also find that firms with higher unemployment risk and skilled labor risk increase their labor costs to a larger extent. Our results are robust to alternative labor cost measures, controlling for potential confounding events, and alternative political connection channels. Our study shows an unintended labor market consequence—increases in labor costs—of political connection disruptions for firms that are adversely affected by such disruptions.

Keywords: Political connection disruptions; Labor cost; Labor productivity; Unemployment risk; Skilled labor risk (search for similar items in EconPapers)
JEL-codes: G38 J21 J30 P26 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:62:y:2020:i:c:s0929119919309381

DOI: 10.1016/j.jcorpfin.2019.101554

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