Pay restrictions and labor investment
Pay restrictions and labor investment
Exploiting the executive compensation reform for state-owned enterprises (SOEs) in China that enforce strict pay restrictions, this study examines whether and how pay restrictions affect firms’ labor investment inefficiency. We find that SOEs experience a decrease in abnormal labor investment following the reform relative to non-SOEs, particularly in over-investment in labor. Our results show that the reform is associated with lower labor investment inefficiency through strengthened internal governance and mitigated internal social comparison. In addition, pay restrictions specifically curb firms’ tendency to over-hire. Further analysis reveals that imposing pay restrictions on executives enhances labor quality and also promotes employee well-being. This study offers novel policy insights by showing how pay restrictions to SOE executives can reduce vertical agency costs and investment inefficiency and enhance workforce quality and well-being in weak institutional environments.
Executive compensation, Internal governance, Labor investment inefficiency, Pay restrictions, Social comparison
Cao, June
af0d62ff-d54c-412f-a152-cc04c63c7290
Hasan, Iftekhar
c13f965e-f6fb-4a1b-af48-e7cb8340f3d0
Zhao, Jingyuan
d385081c-2741-49fb-bbab-aeebf680acde
Huang, Zijie
3803ce66-8758-4360-b960-bc8ab4370ac2
7 March 2026
Cao, June
af0d62ff-d54c-412f-a152-cc04c63c7290
Hasan, Iftekhar
c13f965e-f6fb-4a1b-af48-e7cb8340f3d0
Zhao, Jingyuan
d385081c-2741-49fb-bbab-aeebf680acde
Huang, Zijie
3803ce66-8758-4360-b960-bc8ab4370ac2
Cao, June, Hasan, Iftekhar, Zhao, Jingyuan and Huang, Zijie
(2026)
Pay restrictions and labor investment.
Journal of Corporate Finance, 99, [102990].
(doi:10.1016/j.jcorpfin.2026.102990).
Abstract
Exploiting the executive compensation reform for state-owned enterprises (SOEs) in China that enforce strict pay restrictions, this study examines whether and how pay restrictions affect firms’ labor investment inefficiency. We find that SOEs experience a decrease in abnormal labor investment following the reform relative to non-SOEs, particularly in over-investment in labor. Our results show that the reform is associated with lower labor investment inefficiency through strengthened internal governance and mitigated internal social comparison. In addition, pay restrictions specifically curb firms’ tendency to over-hire. Further analysis reveals that imposing pay restrictions on executives enhances labor quality and also promotes employee well-being. This study offers novel policy insights by showing how pay restrictions to SOE executives can reduce vertical agency costs and investment inefficiency and enhance workforce quality and well-being in weak institutional environments.
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Accepted/In Press date: 1 March 2026
e-pub ahead of print date: 5 March 2026
Published date: 7 March 2026
Keywords:
Executive compensation, Internal governance, Labor investment inefficiency, Pay restrictions, Social comparison
Identifiers
Local EPrints ID: 509874
URI: http://eprints.soton.ac.uk/id/eprint/509874
ISSN: 0929-1199
PURE UUID: c459d3c1-4cc9-4248-b643-6e27548b384e
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Date deposited: 09 Mar 2026 17:59
Last modified: 14 Mar 2026 03:29
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Contributors
Author:
June Cao
Author:
Iftekhar Hasan
Author:
Jingyuan Zhao
Author:
Zijie Huang
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