Purpose Reverse merger (RM) transactions in China are subject to mandatory performance commitments, imposing institution-driven performance pressure on RM firms in the early stages of listing. This paper investigates the impact of performance commitments on firm labor shares using manually collected data on RMs. Design/methodology/approach We manually compile a sample of all firms that went public through RMs as the treatment group. Each of the RM firms is matched with a comparable initial public offering (IPO) firm as the control group. We apply a difference-in-differences design to assess the impact of performance commitments on firm labor shares. We further examine whether this relationship differs based on firm financial pressure and labor quality. Our last analysis test whether the labor investment efficiency of RM firms is affected by performance commitment. Findings We find that RM firms experience a reduction in labor shares during the performance commitment period compared with IPO firms. This effect is particularly pronounced for firms characterized by high levels of debt burden, increased capital intensity and lower labor quality. Moreover, RM firms exhibit diminished labor-investment efficiency throughout the commitment period and lower performance thereafter. Practical implications Regulators may promote a comprehensive registration-based system grounded in information disclosure. A more efficient and transparent listing review process would reduce firms' incentives to pursue RMs and help alleviate the severe information asymmetry in the capital market. When formulating listing-regulation policies, regulators may look beyond the intended benefits and also assess the potential adverse effects on employee welfare. Originality/value Our findings corroborate the view that firms use labor share reductions as a key cost-saving response to the institution-driven performance pressure in RMs and shed light on the consequences of Chinese RM transaction institutions on employee welfare.
Yang et al. (Thu,) studied this question.