Bank Competition and Firm Labor Investment Efficiency: Evidence from China

Abstract

This study examines the impacts of bank competition on firms’ labor investment efficiency. Using geographic location data of commercial bank branches in China, we find that the firms located within more bank branches, namely facing greater bank competition, have higher labor investment efficiency. The possible explanation behind this effect is that the rising bank competition intensity leads to increases in firms’ loans from local banks and decreases in their financial constraints, which improve firms’ labor investment efficiency. Our findings are more pronounced in non-state-owned firms, small firms, and firms with low cash ratios. We provide timely policy implications for central regulators concerned with the consequences of banking deregulation on firms’ labor investment performance.