ECMODE-D-25-01719R1

This study investigates the impact of a firm's human capital, specifically the education level of its workforce, on corporate investment decisions. Our central hypothesis is that firms with a more highly educated workforce face higher labor adjustment costs. These costs stem from the difficulty and expense associated with replacing skilled employees, potential legal challenges, and reputational damage from layoffs. We posit that these high adjustment costs act as a powerful internal governance mechanism, disciplining managers and mitigating their tendency to engage in value-destroying overinvestment (e.g., for empire-building purposes). Our dataset comprises a large panel of Chinese A-share listed companies from 2011 to 2019. The key innovation of our data collection process lies in the measurement of our primary independent variable: employee education.We obtained stock trading data and financial information from the China Security Market and Accounting Research (CSMAR) database. Employee education level data were collected from Wind Data Services over the sample period and cross-checked with company annual reports.