Liquidity improvement and labor investment efficiency: new evidence from China

This study examines how stock liquidity affects corporate labor investment in emerging markets. Leveraging China's Split-Share Structure Reform (CSSR) – which converted non-tradable shares into tradable ones – as a quasi-natural experiment, we show that increased stock liquidity leads to inefficient overinvestment in labor, especially among firms with opaque information environments, short-termist managers, and weak external monitoring. The results suggest that market-pandering and empire-building incentives under weakened governance drive these inefficiencies. Furthermore, heightened liquidity undermines firm productivity and profitability by exacerbating labor misallocation.