With the gradual progress of China’s economic transformation, the government has gradually strengthened labor market regulation and labor protection. As an important labor protection policy, the minimum wage standard has been rising. Considering the linkage of factor markets, the change of minimum wage standard will have an impact on corporate financing decisions. Since factor markets are playing an important role in the economic transformation, we examine the impact of the adjustment of minimum wage standard on corporate leverage and explore the mechanism. It is of great practical significance to clarify the linkage between factor markets and formulate relevant development policies scientifically.

This paper employs the panel data of Chinese A-share listed companies and the minimum wage of prefecture-level cities from 2000 to 2015 to investigate the impact of minimum wage changes on corporate leverage. The main results show that: First, the minimum wage has a significant positive effect on corporate leverage; moreover, this effect is more significant in the subsamples after the year 2004, in the central and eastern regions and of the long-term leverage. Second, the minimum wage has a more significant impact on corporate leverage in labor-intensive cities; additively, it has a significantly positive impact on the capital deepening of enterprises, which corroborates that promoting the deepening of corporate capital is the main mechanism. Third, the positive impact of minimum wage on corporate leverage is more pronounced in the subsamples of non-state-owned enterprises, large asset scale and low financing constraints.

The conclusions of this paper have direct policy implications: First, when formulating and adjusting the minimum wage standard, it needs to consider the impact on the financing of local enterprises, and provide supporting financing policies to achieve the capital deepening of enterprises. Second, when analyzing the logic behind changes in corporate leverage, it is necessary to pay attention to labor factors outside the capital market. Third, considering the obvious heterogeneity of the impact of minimum wage on corporate leverage, the minimum wage change might further affect the size distribution of enterprises, which also requires attention when adjusting the minimum wage standard.

This paper mainly extends the existing literature in two aspects: First, from the perspective of minimum wage, it investigates the impact of labor protection policies on the leverage and the mechanism, and expands the research perspective on corporate leverage and minimum wage. Second, based on the data of cities and enterprises in China, a developing country, it analyzes the impact of labor protection policies on corporate leverage, and enriches the research on the emerging field of “labor and finance” in the context of China’s economic transformation.