Corporate diversification and labor investment efficiency: Evidence from China

Corporate diversification has become increasingly prevalent in modern enterprises. While previous literature has explored the effect of diversification on corporate performance, little is known about whether and how a firm's diversification strategy affects its labor investment decisions. This paper fills this gap by investigating the impact of corporate diversification on labor investment efficiency (LIE) using data from listed firms in China from 2008 to 2019. We demonstrate that diversified firms suffer from lower LIE (mainly underinvestment) than single-segment firms. Further analysis suggests that higher information asymmetry and lower information disclosure quality can aggravate agency problems in diversified firms, leading to inefficient labor investments. The effect is salient in companies with less analyst coverage, lower labor intensity, non-state-owned enterprises, and those in a worse competitive position. Our results remain after addressing endogeneity concerns, including self-selection bias. The findings suggest that corporate diversification leads to inefficient labor investments.