Sustainable growth rate, corporate value of US firms within capital and labor market distortions: The moderating effect of institutional quality

Abstract

Research background: Understanding how distortions in capital and labor markets affect corporate value and sustainable growth is crucial in today's economy. These distortions can disrupt resource allocation and economic sustainability. Additionally, the role of institutional quality in shaping these dynamics requires thorough exploration. Purpose of the article: We quantify the effect of capital and labor market distortions on corporate value and sustainable growth rate (SGR) and how this association is moderated by institutional quality. Methods: Stemming from the sample criteria, we calibrated a final sample of 1971 United States-listed manufacturing firms for 2012–2022. This research offers insights into market inefficiencies and institutional effects. Progressing towards objectives, we use advanced techniques like feasible generalized least squares and generalized methods of moments. These methods help us rigorously analyze complex relationships among study variables. Findings & value added: Three key findings emerge: first, capital and labor market distortions have a negative and significant influence on corporate value and sustainable growth. Our primary finding implies that increasing distortions significantly reduce sustainable growth's value and potential. Second, we find institutional quality has a positive significant effect on corporate value and sustainable growth. Third, institutional quality positively moderates the association between capital and labor market distortions, corporate value, and sustainable growth. Findings suggest that institutional quality, as a potential mechanism, improves the efficiency of resource allocation and optimizes the sustainable economic system to lessen the negative effect of factor market distortions on corporate value and SGR. Besides, we conduct robustness checks to validate our findings. Finally, we offer policymakers and stakeholders actionable insights.