Labour Investment Efficiency and Social Capital

ABSTRACT This study explores the impact of social capital on where a firm is headquartered regarding its labour investment decisions. We show that firms located in counties with high levels of social capital avoid both overinvestment and underinvestment, and thus have more efficient labour investments. We also find that social capital, as an external factor that mitigates conflict, has a stronger effect on reducing inefficient labour investments when a firm is more likely to suffer from agency issues. Overall, our results show that social capital plays a vital role in increasing trust by reducing agency‐infused actions, therefore ensuring efficient investments in labour resources.