Foreign institutional ownership and corporate labor investment

Abstract

We examine the impact of foreign institutional ownership on firms' labor investment efficiency. Using a comprehensive global sample of firms across 37 non‐U.S. countries, we find that greater ownership by foreign institutional investors is significantly associated with lower deviations of labor investment from the level justified by economic fundamentals, that is, higher labor investment efficiency. Independent, U.S.‐based and common‐law foreign institutional investors increase labor investment efficiency to a greater extent than their gray, non‐U.S.‐based and civil‐law peers. We further find evidence supporting the value creation of foreign institutions through the improvement in labor investment efficiency. Overall, our results suggest that foreign institutional investors promote good corporate governance practices around the world.