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This study investigates the effect of employee compensation on corporate investment decisions using a sample of Chinese listed companies during the period 2007–2019. We find that the improvement of employee compensation competitiveness reduces the overall investment level, but improves the investment efficiency, which supports the capital-skill complementarity theory and the liquidity constraint theory, rather than the displacement theory. We use the social insurance law as a quasi-natural experiment, and the adjustment of the personal income tax rate as an instrumental variable to relieve the endogeneity concern. In addition, cross-sectional analysis and mechanism analysis show that employee compensation competitiveness can crowd out enterprise investment and improve investment efficiency by increasing liquidity constraints, thereby improving the quality of human capital and increasing innovation. Overall, this study provides insights into how employee compensation reduces corporate investment and increases corporate investment efficiency in developing countries.

Is “Well-Paid Employment” Worth It? Evidence from Corporate Investment in China