Competitive Pressure and Firm Investment Efficiency: Evidence from Corporate Employment Decisions

Abstract

This study examines the link between product market competition and labor investment efficiency. We find that competitive pressure distorts the efficiency of corporate employment decisions by creating an underinvestment problem. This finding withstands a battery of robustness checks and remains unchanged after accounting for endogeneity concerns. Additional analysis shows that the relation between product market competition and labor investment efficiency is stronger for firms facing higher competitive threats, greater financial constraints, higher information asymmetry, and higher labor adjustment costs. Our results suggest that since competition increases bankruptcy risk, it leads managers to underinvest in labor to avoid incurring labor-related costs.

Keywords: product market competition, risk exposure, labor investment, investment efficiency, import tariffs

JEL Classification: G31, G34, G38, M51