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  • 2022
  • Working Paper
  • HBS Working Paper Series

The Stock Market Value of Human Capital Creation

By: Matthias Regier and Ethan Rouen
  • Format:Print
  • | Language:English
  • | Pages:42
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Abstract

We develop a measure of firm-year-specific human capital investment from publicly disclosed personnel expenses (PE) and examine the stock market valuation of this investment. Measuring the future value of PE (PEFV) based on the relation between lagged PE and current operating income, we first show that PEFV is positively associated with characteristics of human-capital-intensive firms. Next, we find that PEFV has a positive pricing coefficient, implying that the market recognizes some of its variation. In our main analysis, we find that market participants fail to fully impound the investment in human capital. The absolute value of analyst forecast errors is increasing in firm PEFV, and the signed value of these errors reveals that analysts are pessimistic for earnings of firms with high human capital investments. A long-short portfolio based on PEFV produces annualized value- weighted (equal-weighted) abnormal returns of 6.5% (3.5%). Portfolios formed by interacting PEFV with total PE, which combines the current potential investment in human capital with the historic portion of PE that created human capital, increase these returns to between 4.8% and 7.8%. These results are insensitive to numerous empirical choices.

Keywords

Intangibles; Market Valuation; Human Capital; Stocks; Financial Markets; Valuation

Citation

Regier, Matthias, and Ethan Rouen. "The Stock Market Value of Human Capital Creation." Harvard Business School Working Paper, No. 21-047, October 2020. (Revised March 2022.)
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About The Author

Ethan C. Rouen

Accounting and Management
→More Publications

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More from the Authors
  • Passing the Mic: Career and Firm Outcomes of Executive Interactions By: Wei Cai, Ethan Rouen and Yuan Zou
  • Creating and Measuring Purpose at Viega By: Ethan Rouen, Suraj Srinivasan and James Barnett
  • Core Earnings: New Data and Evidence By: Ethan Rouen, Eric C. So and Charles C.Y. Wang
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