Institutional investors' horizons and corporate employment decisions

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 insti...

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Bibliographic Details
Published in:Journal of corporate finance (Amsterdam, Netherlands) Vol. 64; p. 101634
Main Authors: Ghaly, Mohamed, Dang, Viet Anh, Stathopoulos, Konstantinos
Format: Journal Article
Language:English
Published: Elsevier B.V 01.10.2020
Subjects:
Corporate governance
Employment
Institutional ownership
Investment efficiency
Investment horizon
Monitoring
Institutional ownership
Corporate governance
Employment
Investment horizon
Investment efficiency
Monitoring
ISSN:0929-1199, 1872-6313
Online Access:Get full text
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Summary: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. •We offer new evidence on the role of institutional investors in mitigating agency conflicts in firms’' employment decisions.•Firms dominated by long-term shareholders reduce both over-investment and under-investment in employees.•The effect is stronger for firms facing higher labor adjustment costs and attaching more importance to human capital.•It is also more pronounced for firms with more incentives and/or opportunities to deviate from expected net hiring.
ISSN:0929-1199
1872-6313
DOI:10.1016/j.jcorpfin.2020.101634