Effects of human capital on revenues: evidence from professional service organizations in Taiwan

This paper specifies a trans-log revenue function to estimate the relationship between service revenue outputs and three key human capital inputs, including formal education, work experience, and professional training. Using a Taiwanese pooled cross-sectional sample of 22,875 observations over the period 1992-2021, we divide the total sample into international and non-international audit firms based on their total audit revenues. We find that the average partial effects (APEs) on revenues are much higher for international than for non-international audit firms, suggesting that audit firm size affects audit firms’ financial performance. We also find that investments in both formal education and work experience significantly contribute to the growth of service revenues (but if such investments are beyond the optimal level, they may contribute to the reduction of revenues) and that such growth is much larger for international than for non-international audit firms. Although we find that, in our statistical analysis, professional training contributes to the reduction of service revenues, our graphical analysis justifies this intriguing finding, which is attributed to a lagged return on professional training investments. In theory, human capital suggests that professional training is a needed process to raise future service revenues. Overall, our findings shed light on the APEs of human capital inputs on revenue generation and have practical implications for regulators and practitioners to understand how and to what extent human capital can make a positive contribution to the growth of audit firms’ revenues.