The Bright Side of Labor Protection in Emerging Markets: The Case of Firm Information Environment

Abstract

Using a unique regulatory change (the enactment of Labor Contract Law) in China, we find that the strengthening of labor protection leads to a significant increase in the stock price informativeness as well as overall transparency in labor-intensive firms. Further analyses indicate that this relation is driven by a better alignment of incentives between the company board and managers, and therefore managers have less short-term concerns and are willing to disclose more firm-specific information: after the enactment of the Labor Contract Law, labor-intensive firms decrease their managers’ pay-performance sensitivity accompanied with less earnings management, more innovation activities and improved operating efficiency. In addition, the labor protection benefits both stakeholders of labors and shareholders: the labor-intensive firms provide better pay arrangements for labors, receive better operating performances and higher market values. Our findings provide new insights on the bright side of labor protection and throw light on how stringent laws can shape the information environment of emerging markets.