Purpose This paper aims to investigate how institutional investors (IIs) influence corporate employment decisions and reduce labor investment inefficiency through two key mechanisms: active monitoring and market pressure. Design/methodology/approach This study focuses on a panel of 171 nonfinancial French-listed firms from the CAC All-Tradable index over the period 2008–2018 and use OLS regressions with year and industry fixed effects. This setting relies on homogeneous accounting standards, ensuring that labor investment measures and thus the estimated impact of IIs are robust and interpretable. Findings The results show that institutional ownership reduces labor investment inefficiency by curbing abnormal net hiring. This effect is driven by active monitoring from IIs, particularly those with long-term investment horizons, large ownership stakes or board representation. Moreover, the disciplining role of IIs is strengthened by market pressure, as the reduction in abnormal hiring is more pronounced in industries with high product market competition. Practical implications This study offers practical insights for policymakers and financial regulators to strengthen governance and address managerial entrenchment in weak investor protection settings. It also informs debates on institutional cross-ownership and guides investors and boards seeking to enhance efficiency and long-term value creation through active institutional involvement. Originality/value This study is among the first to explore institutional ownership heterogeneity in the context of firms’ labor investment efficiency in France by jointly identifying investors’ passive and active behaviors in terms of horizon and ownership. It also highlights product market competition as a key channel through which IIs influence labor investment efficiency.
Afef Slama (Mon,) studied this question.