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Pay restrictions and labor investment

Author

Listed:
  • Cao, June
  • Hasan, Iftekhar
  • Huang, Zijie
  • Zhao, Jingyuan

Abstract

Exploiting the executive compensation reform for state-owned enterprises (SOEs) in China that enforce strict pay restrictions, this study examines whether and how pay restrictions affect firms’ labor investment inefficiency. We find that SOEs experience a decrease in abnormal labor investment following the reform relative to non-SOEs, particularly in over-investment in labor. Our results show that the reform is associated with lower labor investment inefficiency through strengthened internal governance and mitigated internal social comparison. In addition, pay restrictions specifically curb firms’ tendency to over-hire. Further analysis reveals that imposing pay restrictions on executives enhances labor quality and also promotes employee well-being. This study offers novel policy insights by showing how pay restrictions to SOE executives can reduce vertical agency costs and investment inefficiency and enhance workforce quality and well-being in weak institutional environments.

Suggested Citation

  • Cao, June & Hasan, Iftekhar & Huang, Zijie & Zhao, Jingyuan, 2026. "Pay restrictions and labor investment," Journal of Corporate Finance, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:corfin:v:99:y:2026:i:c:s0929119926000489
    DOI: 10.1016/j.jcorpfin.2026.102990
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    Keywords

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    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics

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