Firm-Level Regulatory Intensity and Labor Investment Efficiency

Abstract

We examine the impact of firm-level regulatory intensity on corporate labor investment efficiency in U.S. firms using a sample from 1995 to 2019. We find that labor investment inefficiency decreases with regulatory intensity, providing evidence that greater regulatory burden pushes managers to make better labor investment decisions. This finding is robust to subsample analyses and various model specifications, suggesting that regulations, though seemingly costly, generate efficiencies and positive externalities. We conclude that regulatory requirements prompt firms to invest in labor more accurately to absorb regulatory compliance costs, and U.S. firms can lift their regulatory burden to some extent through improved labor investment.