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Environmental tightening, labor slackening: Unveiling the inefficiencies in labor investment

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  • Lee, Chien-Chiang
  • Wang, Chih-Wei
  • Lin, Weizheng
  • Lee, Fang-Yi

Abstract

This paper investigates the impact of environmental policy stringency (EPS) on labor investment inefficiency using a dataset of firms from 37 countries. Our study contributes to the literature by addressing a gap in understanding how stringent environmental policies influence corporate labor decisions, particularly regarding inefficient labor investments. To deal with potential endogeneity, we employ robust methodologies, including Two-Stage Least Squares (2SLS) and Difference-in-Differences (DID). Our findings consistently demonstrate that heightened EPS exacerbates labor investment inefficiency. We further explore the mechanisms behind this relationship, revealing that enhanced ESG practices and green innovation serve as mitigating factors. Additionally, the relationship between EPS and labor investment inefficiency is more pronounced in non-crisis periods and more evident in Asia than in other regions. These results carry important implications for policymakers and firms, highlighting the need for strategic labor management and investment in ESG practices under stringent environmental regulations.

Suggested Citation

  • Lee, Chien-Chiang & Wang, Chih-Wei & Lin, Weizheng & Lee, Fang-Yi, 2025. "Environmental tightening, labor slackening: Unveiling the inefficiencies in labor investment," International Review of Financial Analysis, Elsevier, vol. 99(C).
    • Handle: RePEc:eee:finana:v:99:y:2025:i:c:s1057521925000699
    DOI: 10.1016/j.irfa.2025.103982
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    More about this item

    Keywords

    Environmental policy stringency; Labor investment inefficiency; Environmental; Social; and Governance (ESG); Green innovation;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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