Social insurance law and corporate performance in China

Abstract

Social Insurance Contributions exert a liquidity constraint on firms and hence influence the performance of firms. By exploiting the enforcement of China's Social Insurance Law (SIL) in 2011 as a quasi-natural experiment, this paper studies the impact of social insurance contributions on the performance of enterprises through a difference-in-differences method. We find that SIL negatively affects the performance of firms, and this effect is more pronounced in firms with weaker cost-shifting capacity. Mechanism tests prove the liquidity constraints channel through the perspective of the firm's cash flow, accounts payable, investment-cash flow sensitivity, and scale of operations. Our findings demonstrate that firms cannot fully mitigate the negative impact brought by Social Insurance Contributions.