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Parity codetermination at the board level and labor investment efficiency: evidence on German listed firms

Kerstin Lopatta (), Katarina Böttcher (), Sumit K. Lodhia () and Sebastian A. Tideman ()
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Kerstin Lopatta: Chair of Accounting, Auditing and Sustainability, University of Hamburg
Katarina Böttcher: Chair of Accounting and Corporate Governance, Carl von Ossietzky University Oldenburg
Sumit K. Lodhia: Centre for Sustainability Governance, University of South Australia (UniSA) Business School
Sebastian A. Tideman: Chair of Accounting, Auditing and Sustainability, University of Hamburg

Journal of Business Economics, 2020, vol. 90, issue 1, No 3, 57-108

Abstract: Abstract This study examines whether parity codetermination at German supervisory boards improves labor investment efficiency at firm level. We focus on labor, as it is an important production factor. Labor investment decisions are not easily reversible in the short term, given that hiring and firing costs are usually quite high due to labor regulation in Germany. As labor representatives are legally entitled to 50% voting rights at the supervisory board level (parity codetermination), we expect them to contribute insider knowledge to the supervisory board. As they have access to internal documents, we also expect them to reduce information asymmetry and potential agency conflicts between management on the one hand and outsiders such as investors or capital suppliers on the other. Both smaller information asymmetries and reduced agency conflicts, in turn, ought to increase a firm’s labor investment efficiency. Labor investment proxies for deviations from a firm’s optimal level of investment in labor in the form of over- and underinvestment, defined as hiring fewer employees than required to run profitable projects (underhiring) or retaining employees who are occupied with non-profitable projects (overhiring). We measure labor investment efficiency using such a net hiring optimum for a sample of German listed firms between 1995 and 2015. The results indicate that parity codetermination causes a lower deviation from the net hiring optimum. Our results are interesting for various stakeholders, especially for policymakers, managers, shareholders and employees who may not be aware of the importance of codetermination for firm efficiency, as well as for firms that are considering circumventing German legislation.

Keywords: Labor investment efficiency; Codetermination; Two-tier board system; Underhiring; Overhiring; Employee representation; Supervisory Board (search for similar items in EconPapers)
JEL-codes: D22 D25 G30 G39 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11573-019-00930-9

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Handle: RePEc:spr:jbecon:v:90:y:2020:i:1:d:10.1007_s11573-019-00930-9