Does employee representation affect corporate investment efficiency? Evidence from China’s capital market

ABSTRACT This paper is the first empirical study of the economic consequences of the adoption of the employee director system in China from the perspective of the investment efficiency of enterprises, that is, based on empirical study of China’s capital market in order to test the relationship between employee directors and the investment efficiency of listed companies. The results show that employee directors can improve the investment efficiency of listed companies effectively, and this relationship is more significant for state-owned enterprises and enterprises in product markets with low levels of competition. Further research shows that employee directors can restrain not only overinvestment but can also reduce underinvestment. Employee directors can restrain the overinvestment behaviour of state-owned enterprises effectively and reduce underinvestment by non-state-owned enterprises. In product markets with low levels of competition, employee directors can restrain overinvestment, while in product markets with high levels of competition, employee directors can reduce underinvestment.