The influence of stock market liberalization on labor investment decisions: Evidence from China

Hanying Li, Shiguang Ma and Xiaofei Pan

Pacific-Basin Finance Journal, 2025, vol. 93, issue C

Abstract: We investigate the impact of stock market liberalization on firms' labor investment decisions. Exploiting the Mainland-Hong Kong Stock Connect program as an exogenous shock and employing a staggered difference-in-differences approach with a sample of 1938 Chinese listed firms from 2010 to 2020, we find that stock market liberalization enhances labor investment efficiency by correcting both under-investment and over-investment in labors. This main effect remains robust after addressing endogeneity concerns, using alternative samples and different proxies for labor investment efficiency, and the consideration of non-labor investments. Improved stock liquidity and a more transparent information environment, which strengthen market participants' external monitoring, are the two key channels driving these improvements. Cross-sectional analyses indicate that the effect is stronger for non-state-owned enterprises (non-SOEs). Taking a broad view of labor investments, we find that stock market liberalization also fosters more employee-friendly practices through better wages and welfare. Overall, this study underscores the significant role of nationwide financial reform in shaping firms' labor investment decisions.

Keywords: Stock market liberalization; Labor investment decisions; Mainland-Hong Kong stock connect; Quasi-natural experiment (search for similar items in EconPapers)
JEL-codes: G18 G30 J20 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x25001969

DOI: 10.1016/j.pacfin.2025.102859

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