Labor Investment Efficiency and Firm Life Cycle

Abstract

<p>This study examines the association between efficient labor investment and a firm’s life cycle. Investing in labor is an important corporate decision that ensures proper resource allocation and control over costs, which in turn influences a firm’s financial performance at different stages of its life cycle. Based on a sample of U.S. firms from 1989 to 2019, a regression model incorporating 117,462 firm-year observations is used to estimate a measure of labor investment efficiency, while one incorporating 66,940firm-year observations is used to examine the relationship between labor investment efficiency and firm life-cycle stages. The study shows that mature firms are more negatively associated with labor investment inefficiency than other stages of the firm’s life cycle. Thestudy observesaU-shaped patternof laborinvestment efficiencyacrossthestagesof thefirm’s life cycle. That is, absolute values of abnormal net hiring, which indicate inefficiency in labor investment, are higher (lower) during the introduction, growth, shake-out, and decline (mature) stages. The results remain constant after controlling for various factors, including firm size, leverage, cash flow and sales volatilities, using alternative proxies for labor investment efficiency, as well as considering the potential impact of other non-labor investments and labor intensity.</p>