Mutual Fund Investments and Labor Investment Efficiency : Evidence from Korea

[Purpose]This paper examines the effects of mutual fund investments on labor investment efficiency and explores the potential mechanisms that alter a firm’s investment decisions：a firm’s internal cash flows and their affiliation with mutual funds.
[Methodology]We use a sample of Korean firms that were publicly traded between 2008 and 2016 in estimating the effect of mutual fund investments on labor investment efficiency by OLS regression. Propensity score matching and Heckman two－stage regression techniques are used to alleviate endogeneity issue.
[Findings]We found that mutual fund investments increase the efficiency of labor investments by inhibiting underinvestment behavior. Furthermore, additional analyses showed that the positive influence of mutual fund monitoring is stronger for firms that lack internal funds and in cases in which the mutual funds and firms belong to the same business group.
[Implications]This study contributes to the corporate governance literature on the role of institutional investors and extends the prior literature on the determinants of labor investment efficiency.