Abstract
Despite that extant literature has shown that political connections offer various advantages, it is expected that they will lead to sub-optimal investments in firms due to increased agency conflicts and information asymmetry. This paper explores the impact of political connections on labor investment efficiency. We emphasize labor investment because human capital is crucial in creating a competitive advantage for companies and is also considered by politicians. Our results indicate that political connections deteriorate labor investment efficiency in the form of labor over-investment. Thus, companies that have political connections are often inclined to hire more employees in order to leverage the advantages and privileges that come with their connections.
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