Employment, capital market, and corporate policies

Over the past decades, the global labor market has experienced significant restructuring, reflected by persistent mismatches between labor supply and demand. While prior accounting and finance literature has predominantly focused on the capital component of Cobb-Douglas production function, little attention has been paid to labor input. Yet human capital is a more dynamic and innovative production factor in modern corporate governance, playing a decisive role in firm success and, ultimately, in economic growth. As a “proactive resource” that can freely decide whether to join, stay, and contribute efforts, human capital should be strategically managed and effectively incentivized, making firms’ labor investment decisions a critical area of inquiry. Understanding how such decisions vary across contexts and the factors that shape them remain an open question. This thesis thus aims to extend the literature on the determinants of labor investment and the consequences of employee treatments by examining the effects of nationwide reforms and firms’ strategic adjustments in the Chinese setting, consisting of three empirical studies.Chapter 2 investigates the impact of stock market liberalization on firms’ labor investment decisions. Many countries have progressively liberalized their stock markets by removing restrictions on foreign equity investment and encouraging cross-border capital flows, which facilitates foreign investors’ participation and monitoring, mitigates financial constraints, and improves the information environment for domestic firms. Exploiting the Mainland-Hong Kong Stock Connect program as an exogenous shock and employing a staggered difference-in-differences (DID) approach with a sample of 1,938 Chinese listed firms from 2010 to 2020, this chapter shows 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 thus enhanced 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, I find that stock market liberalization also fosters more employee-friendly practices through better wages and welfare. Overall, chapter 2 underscores the significant role of nationwide financial reform in shaping firms’ labor investment decisions.Chapter 3 uncovers an underexplored relation between firm’s strategic employee-related decisions and cash management policy. Framing employee stock ownership plans (ESOPs) as a mechanism for aligning the interests between employees and firms, this chapter investigates the impact of ESOPs on corporate cash holding. Exploiting the gradual adoption of ESOPs in China since 2014 as a quasi-natural experiment, this chapter shows that ESOPs adoption significantly reduces corporate cash holdings by generating incentive and signaling effects that mitigate precautionary motives and by enhancing internal governance to curb agency-driven motives for excessive cash retention. The negative effect is stronger among firms with fewer free-rider issues, greater rank-and-file employee participation, and longer employee stockholding durations. Furthermore, firms adopting ESOPs adjust their cash holdings more swiftly to optimal levels post-adoption, boosting cash’s market value. Chapter 3 highlights ESOPs’ distinctive role in aligning interests, contributing to the broader literature on employee incentive and corporate financial policies.Chapter 4 examines the role of artificial intelligence (AI) adoption in shaping labor investment efficiency in China. Featuring AI technology as a means of labor displacement and utilizing data from Chinese A-share listed firms from 2011 to 2021, I find that firms adopting AI technologies experience significant improvements in labor investment efficiency in the subsequent year, mainly by addressing labor over-investment issues, and achieve better innovation performance in terms of both quantity and quality of patents. Information asymmetry and corporate governance are two plausible channels through which AI adoption exerts influence, while financial constraints, labor skills, and industry competition moderate the effect. The results are robust when employing two-stage least square (2SLS) with instrumental variables, using alternative samples, adopting alternative variable definitions, and considering high-dimensional fixed effects. Chapter 4 highlights the labor-saving role of AI technology, contributes to the broader literature on the determinants of labor investment efficiency, and provides additional evidence on the firm-level impact of AI adoption.Overall, this thesis fits into the dynamics of the global labor market, drawing on the rapid development of China’s labor, capital, and technological markets, it offers additional evidence on factors that enhance labor investment efficiency and, consequently, improve firm performance. It also provides insights into the role of employee incentive plans in China in shaping corporate policies.