Human Capital and Investment Policy

63 Pages Posted: 8 Aug 2017 Last revised: 16 Jan 2018

See all articles by Shuangshuang Ji

Shuangshuang Ji

University of North Carolina (UNC) at Charlotte, The Belk College of Business Administration, Finance, Students

Xinxin Li

University of North Carolina (UNC) at Charlotte - Finance

Date Written: January 9, 2018

Abstract

The literature relates human capital costs to firm leverage (Berk, Stanton, and Zechner (2010) and Chemmanur, Cheng, and Zhang (2013)) and mergers and acquisitions (Lee, Mauer, and Xu (2017)). In this paper, we study the relation between a firm’s human capital costs and investment policy. We argue that employees demand higher pay to compensate for the additional unemployment risk borne by firm’s investment riskiness. We first present a simple theoretical setting to illustrate the positive effects of investment riskiness on average employee pay. We then empirically examine the relation. We find a significantly positive relation between investment riskiness (as proxied by cash flow volatility and unlevered stock return volatility) and human capital cost (as measured by CEO compensation and average employee pay). The effect is stronger in low-pay firms than high-pay firms, and non-technology firms than technology firms. We further investigate four channels through which investment riskiness possibly influence human capital costs: corporate diversification, R&D expenditures, advertising expenditures, and total value of acquisitions in a year. We find that while diversification negatively affects human capital cost, the rest of the three channels have positive effect on human capital costs. Lastly, we show that firms adjust their investment policy based on labor intensity. Our results are robust after accounting for the endogeneity concerns. Overall, our research contributes to the nascent but growing literature on the impact of human capital on firm decisions.

Keywords: Investment policy, Firm risk, Human capital, Human capital costs

JEL Classification: G31, G32, E24, J24

Suggested Citation

Ji, Shuangshuang and Li, Xinxin, Human Capital and Investment Policy (January 9, 2018). Available at SSRN: https://ssrn.com/abstract=3015044 or http://dx.doi.org/10.2139/ssrn.3015044

Shuangshuang Ji

University of North Carolina (UNC) at Charlotte, The Belk College of Business Administration, Finance, Students ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Xinxin Li (Contact Author)

University of North Carolina (UNC) at Charlotte - Finance ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

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