Political uncertainty and labour investment efficiency

ABSTRACT

We examine the impact of political uncertainty on the labour investment efficiency (LIE) of a firm. Using a sample of Chinese firms, we test the market discipline and managerial entrenchment hypotheses. Our findings suggest that political uncertainty adversely affects LIE. The results are consistent with the managerial entrenchment hypothesis. That is, firms hire more labour in a period of increased information asymmetry due to the political uncertainty, which deteriorates LIE. Our findings are robust to a battery of alternative measures of LIE and estimation methods. We conduct several additional analyses and document that the adverse impact of political uncertainty is stronger when the newly appointed government official is older, the firm is state-owned, the firm belongs to a politically sensitive industry or the firm operates in locations with stringent labour protection. By contrast, when the firm locates in a region with weak Chinese government intervention or after President Xi Jinping’s anti-corruption campaign, the adverse impact of political uncertainty on LIE is less pronounced. Last, we document that after hiring more labour, firms receive tangible and intangible benefits in terms of receiving more loans, collect more government subsidies, and able to re-establish some political connection but at the cost of lower performance.

KEYWORDS:

• Political uncertainty
• labour investment efficiency
• political connection
• managerial entrenchment

JEL CLASSIFICATION:

• G18
• G30

Acknowledgements

We acknowledge the helpful comments from an anonymous reviewer. The usual caveats apply. Xiaorong Li acknowledges the financial support from the National Natural Science Foundation of China (Project No. 71972192, 71503283), Fok Ying Tung Education Foundation (Project No. 161077), Zhongcai-CSCI Pengyuan Local Finance Investment and Funding Research Institute, Jingbo Luo thanks the financial support from the National Natural Science Foundation of China (Project No. 71762014), Jiangxi Provincial Department of Education Science and Technology Project (Project No. GJJ180258), Jiangxi Provincial University of Key Research Base of Humanities and Social Sciences Project(Project No. JD19027).

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

¹ We follow D’Agostino et al. (1990) using their test for normality on the residuals of Eq. (1). The JB-statistics has a p-value of 0.6474, indicating that we cannot reject the null hypothesis that the residuals from Eq. (1) are normally distributed.

² The results are available upon request.

³ The results are available upon request.

Additional information

Funding

This work was supported by the Fok Ying Tong Education Foundation [161077]; National Natural Science Foundation of China [71503283]; National Natural Science Foundation of China [71762104]; National Natural Science Foundation of China [71972192]; Jiangxi Provincial University of Key Research Base of Humanities and Social Sciences Project [JD19027]; Zhongcai-CSCI Pengyuan Local Finance Investment and Funding Research Institute [no number];Jiangxi Provincial Department of Education Science and Technology Project [GJJ180258];