Economic effects of major labour reforms: Sectoral heterogeneity and the role of operational efficiency

Abstract

We examine the short‐term stock market reaction to the implementation of India's four consolidated Labour Codes on November 21, 2025. Employing the event study method on 1871 National Stock Exchange‐listed firms, we find a significant negative aggregate market reaction, with a cumulative average abnormal return of approximately −3.54% until the day after the implementation date. We find heterogeneous impact, disproportionately affecting labor‐intensive sectors, while firm‐level operational efficiency amplifies negative postannouncement returns. Results align with contracting cost theory, suggesting investors initially viewed the reforms as a substantial cost shock outweighing potential long‐term efficiency gains. The findings offer critical insights for policymakers and investors.