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The influence of stock market liberalization on labor investment decisions: Evidence from China

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  • Li, Hanying
  • Ma, Shiguang
  • Pan, Xiaofei

Abstract

We investigate the impact of stock market liberalization on firms' labor investment decisions. Exploiting the Mainland-Hong Kong Stock Connect program as an exogenous shock and employing a staggered difference-in-differences approach with a sample of 1938 Chinese listed firms from 2010 to 2020, we find that stock market liberalization enhances labor investment efficiency by correcting both under-investment and over-investment in labors. This main effect remains robust after addressing endogeneity concerns, using alternative samples and different proxies for labor investment efficiency, and the consideration of non-labor investments. Improved stock liquidity and a more transparent information environment, which strengthen market participants' external monitoring, are the two key channels driving these improvements. Cross-sectional analyses indicate that the effect is stronger for non-state-owned enterprises (non-SOEs). Taking a broad view of labor investments, we find that stock market liberalization also fosters more employee-friendly practices through better wages and welfare. Overall, this study underscores the significant role of nationwide financial reform in shaping firms' labor investment decisions.

Suggested Citation

  • Li, Hanying & Ma, Shiguang & Pan, Xiaofei, 2025. "The influence of stock market liberalization on labor investment decisions: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x25001969
    DOI: 10.1016/j.pacfin.2025.102859
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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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