The Influence of Stock Market Liberalization on Labor Investment Decisions: Evidence from China

Abstract

We investigate the impact of stock market liberalization on firms' labor investment decisions. By exploiting the Mainland-Hong Kong Stock Connect program as an exogenous shock and employing a staggered difference-in-differences approach with a sample of 1,938 Chinese listed firms from 2010 to 2020, we find that stock market liberalization improves labor investment efficiency, correcting both under-investment and over-investment in labors. This main effect remains robust across alternative samples, different proxies for labor investment efficiency, considering the impact of non-labor investments, and using placebo tests. Enhanced external monitoring thus improved information environment, as well as increased media coverage are two key channels driving these improvements. Cross-sectional analyses indicate that the effect is stronger for non-state-owned enterprises (non-SOEs) and firms with less liquid stocks. Overall, this study underscores the significant role of nationwide financial reform in shaping firms' labor investment decisions.

Keywords: Stock market liberalization, Labor investment decisions, Mainland-Hong Kong Stock Connect, Quasi-natural Experiment