Organisation capital and labour investment efficiency

Authors

• Hasibul Chowdhury
• Trinh Le
• Kelvin Jui Keng Tan

Abstract

We examine whether a firm’s organisation capital (OC) affects its labour investment efficiency. We find that a higher level of OC is related to lower deviations from the optimal level of labour investment according to economic conditions (higher labour investment efficiency). We find that this result is empirically robust to a stacked difference-in-differences approach using exogenous CEO turnover as a quasi-natural experiment and planned CEO retirements and forced CEO turnovers as placebo tests. We identify that the ability to retain talented employees and reduction of agency costs are the two channels by which OC improves a firm’s labour investment efficiency. Furthermore, we report that the positive effect of OC on labour investment efficiency is more pronounced in firms in highly competitive markets, firms with better access to external financing and firms with highly skilled labour.