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Labor inflexibility and investment sensitivity to value-added growth

Author

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  • An, Enxi
  • Yung, Kenneth

Abstract

Firms that rely more on skilled workers tend to retain the workers because they are expensive to hire and fire. The retention of skilled workers exposes firms to labor inflexibility and elevates firm risk. Labor inflexibility diminishes investment sensitivity to value-added growth (ISVAG), that is, resources are not allocated efficiently. Our results are unaffected by unobserved firm or industry heterogeneity. Using the dot-com crisis of 2000 as a natural experiment, we find the impact of retaining skilled workers on ISVAG turned positive in the 3-year interval following the dot-com crisis, after many skilled workers had been laid off. Additionally, we find results suggesting that ineffective firm monitoring is a channel connecting labor inflexibility and diminished ISVAG. Firms should consider the negative implications of labor inflexibility associated with the hoarding of skilled workers when making employment decisions.

Suggested Citation

  • An, Enxi & Yung, Kenneth, 2026. "Labor inflexibility and investment sensitivity to value-added growth," Research in International Business and Finance, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:riibaf:v:88:y:2026:i:c:s0275531926001637
    DOI: 10.1016/j.ribaf.2026.103436
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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