Environmental tightening, labor slackening: Unveiling the inefficiencies in labor investment

Chien-Chiang Lee (), Chih-Wei Wang, Weizheng Lin and Fang-Yi Lee

International Review of Financial Analysis, 2025, vol. 99, issue C

Abstract: This paper investigates the impact of environmental policy stringency (EPS) on labor investment inefficiency using a dataset of firms from 37 countries. Our study contributes to the literature by addressing a gap in understanding how stringent environmental policies influence corporate labor decisions, particularly regarding inefficient labor investments. To deal with potential endogeneity, we employ robust methodologies, including Two-Stage Least Squares (2SLS) and Difference-in-Differences (DID). Our findings consistently demonstrate that heightened EPS exacerbates labor investment inefficiency. We further explore the mechanisms behind this relationship, revealing that enhanced ESG practices and green innovation serve as mitigating factors. Additionally, the relationship between EPS and labor investment inefficiency is more pronounced in non-crisis periods and more evident in Asia than in other regions. These results carry important implications for policymakers and firms, highlighting the need for strategic labor management and investment in ESG practices under stringent environmental regulations.

Keywords: Environmental policy stringency; Labor investment inefficiency; Environmental, Social, and Governance (ESG); Green innovation (search for similar items in EconPapers)
JEL-codes: C33 F30 G38 Q54 Q58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:99:y:2025:i:c:s1057521925000699

DOI: 10.1016/j.irfa.2025.103982

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