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| The Impact of Workforce Replacement by Machines on Equity Capital Costs |
| ZENG Aimin, OUYANG Fangfang, WEI Zhihua, ZENG Huiyu
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School of Accounting, Zhejiang Gongshang University;
School of Economics, Xiamen University |
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Abstract China's economy is entering a new stage driven simultaneously by population aging and rapid technological progress. On the one hand, population aging has intensified labor market imbalances and pushed up labor costs; on the other hand, breakthroughs in artificial intelligence, industrial robotics, and other hard technologies, together with deep digital transformation, are reshaping the configuration of production factors. These dual transformations provide strong incentives and momentum for enterprises to pursue workforce replacement by machines. Current academic research on the economic consequences of workforce replacement by machines remains nascent. At the macro level, existing literature mainly focuses on its impact on labor markets, finding that workforce replacement can generate both “substitution effects,” which reduce labor demand, and “scale effects,” which increase it. At the micro level, studies indicate that workforce replacement can improve production efficiency by reducing costs and stimulating innovation. However, little attention has been paid to its impact on corporate financing activities, even though financing costs are critical to the implementation of workforce replacement by machines.
Because workforce replacement by machines typically involves large-scale, long-term capital investments, equity capital costs have become a key channel to ease rigid funding requirements. Examining whether and how workforce replacement affects equity capital costs not only helps reveal investors' attitudes toward firms developing new quality productive forces through such transformation, but also tests the efficiency of capital market resource allocation. Theoretically, workforce replacement may reduce equity capital costs by enhancing production efficiency, improving firms' adaptability to market changes, and lowering operational risks; it may also improve internal controls, reduce the risk of material misstatements, and enhance earnings information quality, all of which further decrease equity capital costs. Conversely, acquiring large amounts of machinery may raise operating and financial risks, highlighting the need for rigorous empirical analysis.
Using data from Chinese A-share listed companies, this study empirically examines the effect of workforce replacement by machines on equity capital costs. The results show that workforce replacement significantly reduces firms' equity financing costs, and this finding remains robust under various tests. Mechanism analysis suggests that this effect operates through reduced business risk and improved earnings information quality. Further heterogeneity analyses reveal that the effect is more pronounced when firms or regions exhibit higher levels of digitalization, when labor protection regulations are stricter, and when a larger share of the workforce is low-skilled, indicating that workforce replacement interacts with contextual factors to reduce equity capital costs more effectively. This study provides empirical evidence on how productivity transformation affects capital markets and demonstrates that capital markets can support the development of new quality productive forces and the pursuit of high-quality economic growth.
The contributions of this paper are threefold. First, it expands research on the microeconomic consequences of workforce replacement by machines by showing that it significantly lowers equity financing costs, indicating that capital markets can recognize and reward firms' transformation toward new quality productive forces, thereby providing empirical support for the role of capital markets in facilitating high-quality economic transition. Second, it explores dual mechanisms: through enhanced production efficiency and reduced operational risk, as well as improved internal controls and earnings information quality, that explain how workforce replacement lowers equity capital costs. Third, it examines heterogeneity from the perspectives of digital technology adoption and workforce composition, offering practical implications for firms implementing workforce replacement strategies.
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Received: 25 July 2024
Published: 02 October 2025
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