Impact of financial regulation on labor income share: Evidence from China

Abstract

Following the implementation of China's new asset management regulations as an exogenous event, this paper explores the changes in corporate labor income share brought about by the financial regulation. Through a series tests, we demonstrate that financial regulation has a positive impact on China's corporate labor income share. We find the ‘de-financialization’ effect associated with China's new asset management regulations has lowered the cost of corporate financing and improved the human capital structure, which act as transmission mechanisms of our result. On the cross section, the positive impact of financial regulation on corporate labor income share is particularly pronounced for Chinese State-Owned Enterprises (SOEs), and firms which are led by executives with a background in finance, and firms which have excessive capital investment or weak capital-labor interchangeability. In addition, this enhancement effect is affected by the degree of firms' principal agency and the importance they place on innovative. In summary, our study shed light on how government financial policy sharps corporate behavior in emerging market country, thus expanding and supplementing the existing literature. The result is of great significance to attempt to formulate financial regulatory policy and promote common prosperity in China.