Business Strategy and Labour Investment Efficiency
International Review of Finance, Forthcoming
Posted: 17 Mar 2019
Date Written: February 5, 2019
Abstract
This paper examines the relation between business strategy and labour investment efficiency. Since business strategy affects both the agency problem and firm-level uncertainty, as well as the overall shape of corporate behaviour, we would expect the efficiency of labour investment to vary with the particular business strategy a firm pursues. Using a large sample of US data, we find that firms having a prospector-type business strategy are associated with inefficient labour investment, while those having a defender-type business strategy are associated with efficient labour investment. We provide evidence that uncertainty, rather than the agency problem, causes prospector-type firms to exhibit inefficient labour investment. Finally, we document that inefficient labour investment by prospectors leads to relatively low profitability in subsequent periods. These findings are robust when subjected to a series of sensitivity tests.
Keywords: Business Strategy; Prospector; Defender; Labour Investment; Agency Problem
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