Institutional investors' horizons and corporate employment decisions |
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| Institution: | 1. UQ Business School, The University of Queensland, St Lucia, QLD 4067, Australia;2. Faculty of Business Administration, Memorial University of Newfoundland, St. John''s, NL A1B 3X5, Canada;3. UWO College of Business, University of Wisconsin – Oshkosh, 800 Algoma Blvd, Oshkosh, WI 54901, United States of America;1. Graduate School of International Studies, Sogang University, South Korea;2. College of Business, Korea Advanced Institute of Science and Technology (KAIST), South Korea;3. College of Business Administration, University of Seoul, South Korea;1. School of Finance, Jiangxi University of Finance and Economics, China;2. School of Economics and Finance, Massey University, New Zealand;1. South Champagne Business School, Troyes, France;2. University of Ottawa, Telfer School of Management, Ottawa, ON, Canada;3. University of Windsor, Odette School of Business, Windsor, ON, Canada;4. IRG, Université Paris Est, Créteil, France;1. Monash Business School, Monash University, Australia;2. UQ Business School, University of Queensland, Australia;1. Department of Economics, Danang Architecture University, Danang, Vietnam;2. Department of Finance, National Central University, Taiwan |
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| Abstract: | Monitoring by long-term investors should reduce agency conflicts in firms' labor investment choices. Consistent with this argument, we find that abnormal net hiring, measured as the absolute deviation from optimal net hiring predicted by economic fundamentals, decreases in the presence of institutional investors with longer investment horizons. Firms dominated by long-term shareholders reduce both over-investment (over-hiring and under-firing) and under-investment (under-hiring) in employees. The monitoring role of long-term investors is stronger for firms facing higher labor adjustment costs both in absolute terms and relative to capital adjustment costs, and those for which human capital is regarded as more important. The effect is also more pronounced for firms that have stronger incentives and/or more opportunities to deviate from expected net hiring. We address endogeneity concerns by exploiting exogenous changes to long-term institutional ownership resulting from annual reconstitutions of the Russell indexes. |
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