Firm Efforts to Improve Employee Quality and Corporate Investment Efficiency
64 Pages Posted: 30 Mar 2020 Last revised: 26 Jun 2020
Date Written: March 28, 2020
We examine the effect of employee quality development on investment efficiency. Employees at all levels of an organization, as well as the corporate executives, may play a significant role for efficient corporate investment. Thus, human capital development efforts that improve employee quality should be associated with efficient corporate investment. However, the outcome of such provisions can be controversial, as they are often ineffective, costly, have dis-synergies and can deprive other types of investments of funding, which could lead to deviations from optimal investment. Using a large sample of US firms for the period 2002-2016, our findings reveal that human resource practices are negatively associated with investment efficiency, inducing both over- and under-investment. Results are driven mainly by human resource practices with a more direct cash cost, and are more pronounced with respect to investment in NonCapex projects. We interpret our evidence as consistent with agency motivations driving the practices geared towards employee development, and with such expenditure ultimately not aligning the interests of employees and shareholders.
Keywords: Human Resource Practices, Employee Quality, Investment Efficiency, Over-Investment, Under-Investment
JEL Classification: O15, G10, G31
Suggested Citation: Suggested Citation