Labor Cost Stickiness, Corporate Investment, and Firm Value

57 Pages Posted: 16 Sep 2016 Last revised: 28 Aug 2022

See all articles by DuckKi Cho

DuckKi Cho

Peking University HSBC Business School

Date Written: August 27, 2022


Firms reduce investment when facing labor cost stickiness, the inability or unwillingness to adjust wages downward. I construct labor cost stickiness measures and exploit staggered state-level changes in minimum wage laws as an exogenous variation in labor cost stickiness to document this fact. Following a one standard deviation increase in the minimum wage, firms reduce their investment rate by 2.68 percentage points. The negative effect is more pronounced for firms in industries with a higher percentage of hourly workers with earnings close to the prevailing minimum wage, those in states with stronger employment protection laws, and those with higher labor intensity or stickier product prices. The investment cut cannot be explained by labor adjustment under capital-labor complementarities. Rather, I identify aggravation of debt overhang and increased operating leverage as mechanisms by which sticky labor costs impede investment. Finally, this friction enhances the firm value and production efficiency when firms are subject to other frictions causing overinvestment, which is consistent with the theory of second best.

Keywords: Labor Cost Stickiness, Corporate Investment, Minimum Wage, Debt Overhang, Operating Leverage, Theory of Second Best

JEL Classification: D24, G31, J30, K31, M41

Suggested Citation

Cho, DuckKi, Labor Cost Stickiness, Corporate Investment, and Firm Value (August 27, 2022). Available at SSRN: or

DuckKi Cho (Contact Author)

Peking University HSBC Business School ( email )

Room 751
Peking University HSBC Business School
Shenzhen, Guangdong 518055
8675526032795 (Phone)


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