Labor Costs and Investments in Human Capital
35 Pages Posted: 9 Oct 2008
Date Written: November 1999
This study examines the disclosure of labor-related costs by US firms, and estimates the proportion of these costs that are valued as an asset (human capital) by the market. Separate identification of labor-related costs in US financial reports is voluntary, and is made consistentlyonly by about 10% of all US Compustat firms. The probability of disclosure is found to bepositively related to firm size, labor intensity and membership in regulated industries and is inversely related to industry concentration.Using a modification of Ohlson's (1995) framework the study finds that on average about 16% of all such costs are valued by the market as an investment in human capital, and that this human capital asset amortizes at a rate of about 34% per year. Further, the human capital asset averages about 5% of the total market value of the firm and accounts for about 16% of the difference between market and book value. The ratio of the human capital asset to market value is found to be positively related to average salary paid to employees, operating uncertainty, andthe ratio of labor expenses to sales, but inversely related to the firm s size.
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