When firing is hard: Labor adjustment costs and corporate investment style

This study investigates how the cost of hiring and firing employees-known as labor adjustment cost-shapes corporate investment style. Using employee education as a measure of these costs in Chinese listed firms, we find that a more educated workforce increases labor adjustment costs, which in turn curbs abnormal investment. Furthermore, firms facing higher labor adjustment costs exhibit longer investment horizons, more diversified strategies, and greater risk awareness. Firms with a more educated workforce exhibit higher labor adjustment costs, reflected in more labor litigations and a lower propensity to lay off employees. Our findings, robust to endogeneity tests, highlight that labor costs are not merely an expense but a strategic factor that disciplines investment behavior and promotes sustainable growth. Recognizing this can guide firms in talent management and regulators in policy design.