Social Trust and Corporate Labor Investment Efficiency
SHEN Danlin, JIANG Xuanyu
School of Management, China University of Mining & Technology (Beijing); School of Accountancy, Central University of Finance & Economics / China's Management Accounting Research & Development Center
Summary:
Labor is an especially important resource for firms, and it is crucial for the competitiveness of micro enterprises and the development of the macro economy. Therefore, exploring the factors that influence corporate labor investment efficiency is significant in both theory and practice for enhancing the competitive advantage of enterprises and adapting to economic development trends. The literature examines the factors that influence labor investment efficiency from the perspective of formal systems, such as labor protection, relaxation of short selling constraints, and financial reporting quality, but it neglects the role of informal systems. It is worth noting that formal systems cannot stipulate all operating rules in detail. This suggests the need to investigate the role of informal systems that are internalized in habit and cognition and impose involuntary constraints. As an informal system, trust is a vital form of social capital. However, current research does not explore whether and how social trust affects labor investment efficiency. Based on a sample of China's A-share listed companies from 2010 to 2018, this paper studies the relation between social trust and labor investment efficiency. The results show that social trust improves corporate labor investment efficiency. Further research demonstrates that the relation between social trust and labor investment efficiency is stronger in firms with severe financial constraints and serious agency conflicts. Moreover, as information asymmetry increases, social trust plays a more significant role in promoting labor investment efficiency. In addition, the effect of improved social trust on corporate labor investment efficiency is mainly manifested in a reduction in under-investment in labor. Social trust can reduce both under-hiring and over-firing of labor. The main contributions of this paper are as follows. First, by focusing on social trust, the study enriches the literature on the factors influencing corporate labor investment efficiency. Previous studies show that financial reporting quality, conditional conservatism, monitoring of long-term institutional investors, relaxation of short selling constraints, and labor protection are significantly related to corporate labor investment efficiency. However, the literature mainly focuses on formal systems. This paper extends attention to informal systems and discusses the relation between social trust and corporate labor investment efficiency, and thus supplements the existing research. Second, the study expands the literature on the impact of social trust on micro enterprises from the perspective of corporate labor investment efficiency. Previous research demonstrates the effect of social trust on trade credit, bank loans, risk-taking, mergers and acquisitions, innovation, capital investment efficiency, etc., but neglects labor investment efficiency. There are many differences between labor investment and capital expenditure, and thus the conclusions of previous research concerning the relation between social trust and capital investment efficiency may not be applicable to labor investment efficiency. In addition, labor investment efficiency affects firm performance and macroeconomic growth. This paper relates social trust to labor investment efficiency to obtain a better understanding of how social trust influences the development of micro enterprises and macroeconomic growth. Third, this paper identifies the mechanisms and specific forms of social trust that can improve corporate labor investment efficiency. The study provides empirical evidence for the mechanisms through which social trust enhances labor investment efficiency from the perspective of financial constraints and agency conflicts. Following prior studies, the paper partitions the sample into subsamples: labor over-investment (over-hiring and under-firing) and labor under-investment (under-hiring and over-firing). It then runs regressions on the subsamples to explore the specific forms of social trust affecting labor investment efficiency. This can not only reveal the underlying mechanisms of social trust influencing labor investment efficiency but also provide insights into the relation between social trust and corporate labor investment.
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