The Bright Side of Labor Protection in Emerging Markets: The Case of Firm Transparency
Pacific Basin Finance Journal, Forthcoming
45 Pages Posted: 21 Jan 2016 Last revised: 6 Jul 2017
Date Written: July 1, 2017
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: Suggested Citation