Disruption of corporate financialization and labor cost growth: Evidence from China’s new asset management rules

The new asset management rules in China bring financial institutions under a unified regulatory framework, aiming to curb regulatory arbitrage, control systemic risk, and improve financial stability. Exploiting the new-rules-induced exogenous shock that disrupts corporate financialization, this study finds that firms with ex ante higher degrees of financialization respond to the regulation by increasing labor costs. Management’s financial expertise and ownership concentration are mechanisms through which disruption of financialization affects corporate employment strategies. The impact of the new rules on labor costs is more pronounced for firms with lower bankruptcy risk, located in coastal cities, and experiencing intense industry competition. The findings imply an unintended spillover effect of financial regulation on the labor market in the form of labor cost growth.