Foreign institutional investors and corporate labor investment efficiency

Purpose This article examines the relationship between foreign institutional ownership and firms’ labor investment efficiency. Design/methodology/approach A series of regression models are performed to examines the research question. Findings We find that foreign institutional investors enhance firms’ labor investment outcomes primarily through mitigating asymmetric information and by strengthening internal governance. Specifically, the influence of foreign institutional investors on a firm’s labor investment efficiency is stronger when the firm faces greater labor adjustment frictions. This effect is more evident when foreign institutional investors are originated from countries or areas with stronger cultural connections to China, stronger governance quality, common law traditions or stronger bargaining power in the firms’ governance. Practical implications Pragmatically, our research implies that opening capital markets to foreign investment, particularly by introducing institutional investors from other countries or regions, can help domestic firms to achieve higher efficiency of human resource allocation. Another implication of our research could be that foreign institutional investors, as one type of institutional investors, do play a significant role in improving the efficiency of firms’ human resource allocation. This is because, aside from the common effects of large shareholders in participating in corporate governance, the foreign institutional investors may bring about other things, such as the industrial practices prevalent in the setting of the common law system. Originality/value The potential contributions of this paper are twofold. First, this paper documents the monitoring role of FIIs from a new perspective: firms’ labor investment decisions. Second, this paper enriches the literature on the determinants of firms’ labor investment decisions.