The Bright Side of Labor Protection in Emerging Markets: The Case of Firm Transparency

Pacific Basin Finance Journal, Forthcoming

2016 Financial Markets and Corporate Governance

45 Pages Posted: 21 Jan 2016 Last revised: 6 Jul 2017

See all articles by Xiaoran Ni

Xiaoran Ni

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE); Xiamen University - School of Economics

Weikang Zhu

PBC School of Finance; Finance

Date Written: July 1, 2017

Abstract

Using a unique regulatory change (the enactment of the Labor Contract Law) in China, we find that the strengthening of labor protection leads to a significant increase in firm transparency. Further analyses indicate that stronger labor protection reduces operating flexibility, which can exert external pressure on firms and exacerbate managerial short-termism problems. To counteract the unfavourable challenge, shareholders re-contract with managers by granting more equity incentives and less perks. This improved compensation structure relieves managers from short-term concerns and incentivizes them to disclose more firm-specific information. Our findings provide new insights on the bright side of labor protection and shed light on how stringent laws can shape the information environment in emerging markets.

Keywords: Firm Transparency; Labor Contract Law; Labor Protection; Quasi-Natural Experiment; Stock Price Informativeness

JEL Classification: G30, G38, M41, J50

Suggested Citation

Ni, Xiaoran and Zhu, Weikang, The Bright Side of Labor Protection in Emerging Markets: The Case of Firm Transparency (July 1, 2017). Pacific Basin Finance Journal, Forthcoming, 2016 Financial Markets and Corporate Governance, Available at SSRN: https://ssrn.com/abstract=2719622 or http://dx.doi.org/10.2139/ssrn.2719622

Xiaoran Ni

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

D 204, Economics Building
Xiamen, Fujian 361005
China

Xiamen University - School of Economics ( email )

China

Weikang Zhu (Contact Author)

PBC School of Finance ( email )

Beijing, 100084
China

Finance ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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