Downward Wage Ridigity, Corporate Investment, and Firm Value

57 Pages Posted: 16 Sep 2016 Last revised: 29 Jan 2023

See all articles by DuckKi Cho

DuckKi Cho

The University of Sydney - Discipline of Finance

Date Written: November 3, 2022

Abstract

Firms reduce investment when facing downward wage rigidity (DWR). I construct DWR measures and exploit staggered state-level changes in minimum wage laws as an exogenous variation in DWR to document this fact. Following a one-standard-deviation increase in the minimum wage, firms reduce investment rates by 2.68 percentage points. The investment cut cannot be explained by labor adjustment under capital-labor complementarities. I identify aggravation of debt overhang and increased operating leverage as mechanisms by which DWR impedes investment. Finally, DWR enhances value and production efficiency when firms are subject to other frictions causing overinvestment, consistent with the theory of second best.

Keywords: Downward Wage Rigidity, Corporate Investment, Minimum Wage Laws, Theory of Second Best

JEL Classification: D25, I38, J31, J38, K31

Suggested Citation

Cho, DuckKi, Downward Wage Ridigity, Corporate Investment, and Firm Value (November 3, 2022). Available at SSRN: https://ssrn.com/abstract=2839385 or http://dx.doi.org/10.2139/ssrn.2839385

DuckKi Cho (Contact Author)

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

HOME PAGE: http://https://sites.google.com/view/duckkicho/home

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