Restrictions on foreign labor supply and firms' information production

Abstract

This study posits that U.S. firms’ information production can benefit from employing foreign workers, who possess unique advantages in acquiring and processing information on foreign operations, and hence that restrictions on foreign labor supply hinder information production. Exploiting the H-1B quota reduction in 2004 as a shock to the supply of foreign workers, this study examines the consequence for U.S. listed firms’ information production as reflected by the frequency and accuracy of management earnings forecasts. I categorize H-1B workers into administrative and non-administrative types and find that firms demanding more H-1B administrative workers, who directly participate in information production, before the H-1B quota reduction experienced significant reductions in management forecast frequency and accuracy after 2004; in sharp contrast, no such effect is found among firms demanding more H-1B non-administrative workers before 2004. Cross-sectional tests show that the impact of the H-1B quota reduction on information production is concentrated in firms with more foreign exposure and in those with offshoring activities in foreign countries that are more dissimilar from the U.S. in culture and language. Additional tests show that the abundance of local educated labor supply does not attenuate the impact of H-1B quota reduction on information production, suggesting that H-1B administrative workers are not hired for their low cost. This study highlights the consequences of the H-1B quota reduction on firms’ information production.