Minimun Wage,Financial Behavior,and Ecomonic Outcomes-the Case Of China Listed Firms

The minimum wage standard is an important vehicle for the government to protect the interests of labor.Since the Minimum Wage Provisions’ implementation in 2004,China’s minimum wages have been raised frequently and sharply.In particular,during the 12th Five-Year Plan period(2011-2015),China’s minimum wages’average annual growth rate exceeded 13%.Although raising minimum wages increases the workers’income,it also makes the listed companies bear a more significant labor cost burden.The rising labor cost reduces companies’profit,available internal funds,and induces higher operational risk,all of which may have essential impacts on firms’operation and financial behavior.The minimum wage has been a hot research topic in recent years.However,previous researches mainly focus on the economic effects.And studies about minimum-wage’s effects on firms’financial behavior are still insufficient.This paper focuses on the impacts of the minimum-wage hikes on listed firms’financial behavior in China and tries to discuss the following questions:Firstly,facing the rising labor costs,whether firms will invest more in R&D,and what is the mechanism?Secondly,whether and how the minimum-wage hikes will affect the cash holdings of listed firms?What are the possible sources of cash holdings of these firms?Thirdly,whether the minimum-wage hikes could play a role in corporate governance to curb the scale of listed companies’ goodwill?Using hand collecting minimum-wage data of 339 cities in China and the sample of Chinese A-share listed companies,this paper empirically test the impact of minimum wages on listed firms’ financial behaviors and economic outcomes.First of all,the minimum-wage hikes significantly increase firms’ R&D investments.The specific mechanism is that the minimum-wage hikes lead to the factorsubstitution effect and competitive-pressure effect,forcing firms to increase R&D investments.Meanwhile,the minimum-wage hikes could improve corporate governance by alleviating the agency problem’s negative impact and the management myopia on R&D investments.Further study shows that:a)the minimum-wage hikes have more positive impacts on R&D investment of labor-intensive firms,non-stateowned enterprises,and firms with lower financing costs;b)in terms of innovation output,the minimum-wage hikes significantly promote the patents of listed firms in both quality and quantity;c)in addition,the consequent increase in R&D investment is a long-term strategy rather than a short-term behavior,and d)this long-term strategy significantly enhances the value of the companies.Secondly,the minimum-wage hikes significantly increase firms’ cash holdings.On average,for every RMB100 increase in the monthly minimum wage,the local firms’cash holdings increase by 2.99 percent.The corresponding mechanism might be that the minimum-wage hikes intensify the transaction motive and the precautionary motive of cash holding,thus encouraging firms to hold more cash.Besides,the increased cash holding stems from internal financing by enhancing working capital management efficiency rather than reducing cash dividends or investment expenditures.Furthermore,the minimurm wages’ impacts on cash holdings are more pronounced for state-owned enterprises,firms with severe financing constraints,and firms with a large proportion of low-educated employees.In addition,the minimum wages’ impacts on corporate cash holdings show some degree of sustainability.Finally,the induced cash holdings increase contributes to firm value.Finally,the minimum-wage hikes restrain the scale of goodwill by increasing the labor costs and operational risk of listed firms.The rise of minimum wages objectively plays a role in corporate governance.It might alleviate the problem of oversize goodwill,which is incurred by two kinds of agency problems and managerial overconfidence.Further study shows that the minimum-wage hikes could reduce the premium paid by the acquiring firm and would not increase the scale of listed firms’ goodwill impairment.Oversize goodwill might be detrimental to the performance,operation,and development of the listed firms.Furthermore,the minimum-wage hikes have a longlasting inhibitory effect on goodwill.Stated thus,facing the "hardships" induced by the minimum-wage hikes,firms do increase R&D investments and cash holdings,while decrease M&A goodwill.Although raising minimum wages increases the listed companies’ labor cost burden,it reshapes their financial behaviors.In theory,our research enriches the strand of literature about the economic outcomes of minimum-wage hikes.In practice,it provides useful enlightenments for government to improve the minimum wages system and for firms to operate more effectively when facing rising minimum wages.