IDEAS home Printed from https://ideas.repec.org/a/oup/revfin/v27y2023i5p1659-1698..html
   My bibliography  Save this article

Trading on Talent: Human Capital and Firm Performance

Author

Listed:
  • Anastassia Fedyk
  • James Hodson

Abstract

How is technically skilled human capital reflected in firm performance? We leverage a uniquely detailed employer–employee matched dataset to measure US firms’ technical human capital in information technology (IT), Software Engineering, Mobile Networks, Data Analysis, and Web Development. All five technical skillsets are associated with higher firm valuations. However, they negatively forecast both financial and operational performance in the future. For example, a one-standard-deviation increase in employees with IT skills corresponds to 2.2% higher Tobin’s q but predictable future returns of –10 basis points per month. Our results are stronger in tighter labor markets, in firms with more cash, and during time periods when each technical skillset is especially popular. These patterns suggest that the market expects too much from popular technologies, leading to over-valuation. Overall, our results highlight how corporate over-investment can extend to intangible capital such as skilled employees.

Suggested Citation

  • Anastassia Fedyk & James Hodson, 2023. "Trading on Talent: Human Capital and Firm Performance," Review of Finance, European Finance Association, vol. 27(5), pages 1659-1698.
    • Handle: RePEc:oup:revfin:v:27:y:2023:i:5:p:1659-1698.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rof/rfac068
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Paul Beaudry & David A. Green & Benjamin M. Sand, 2016. "The Great Reversal in the Demand for Skill and Cognitive Tasks," Journal of Labor Economics, University of Chicago Press, vol. 34(S1), pages 199-247.
    2. Tania Babina & Alex X. He & Anastassia Fedyk & James Hodson, 2022. "Artificial Intelligence, Firm Growth, and Product Innovation," NBER Chapters, in: Economics of Artificial Intelligence, National Bureau of Economic Research, Inc.
    3. Morck, Randall & Shleifer, Andrei & Vishny, Robert W, 1990. "Do Managerial Objectives Drive Bad Acquisitions?," Journal of Finance, American Finance Association, vol. 45(1), pages 31-48, March.
    4. Andrés Donangelo, 2014. "Labor Mobility: Implications for Asset Pricing," Journal of Finance, American Finance Association, vol. 69(3), pages 1321-1346, June.
    5. Luigi Zingales, 2000. "In Search of New Foundations," Journal of Finance, American Finance Association, vol. 55(4), pages 1623-1653, August.
    6. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    7. Frederico Belo & Xiaoji Lin & Santiago Bazdresch, 2014. "Labor Hiring, Investment, and Stock Return Predictability in the Cross Section," Journal of Political Economy, University of Chicago Press, vol. 122(1), pages 129-177.
    8. Donangelo, Andres & Gourio, François & Kehrig, Matthias & Palacios, Miguel, 2019. "The cross-section of labor leverage and equity returns," Journal of Financial Economics, Elsevier, vol. 132(2), pages 497-518.
    9. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    10. Andrea L. Eisfeldt & Dimitris Papanikolaou, 2013. "Organization Capital and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 68(4), pages 1365-1406, August.
    11. Lev, Baruch & Sougiannis, Theodore, 1996. "The capitalization, amortization, and value-relevance of R&D," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 107-138, February.
    12. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    13. So, Eric C. & Wang, Sean, 2014. "News-driven return reversals: Liquidity provision ahead of earnings announcements," Journal of Financial Economics, Elsevier, vol. 114(1), pages 20-35.
    14. Mohamed Ghaly & Viet Anh Dang & Konstantinos Stathopoulos, 2017. "Cash Holdings and Labor Heterogeneity: The Role of Skilled Labor," The Review of Financial Studies, Society for Financial Studies, vol. 30(10), pages 3636-3668.
    15. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    16. Zhi Da & Umit G. Gurun & Mitch Warachka, 2014. "Frog in the Pan: Continuous Information and Momentum," The Review of Financial Studies, Society for Financial Studies, vol. 27(7), pages 2171-2218.
    17. Michael J. Cooper & Orlin Dimitrov & P. Raghavendra Rau, 2001. "A Rose.com by Any Other Name," Journal of Finance, American Finance Association, vol. 56(6), pages 2371-2388, December.
    18. Edmans, Alex, 2011. "Does the stock market fully value intangibles? Employee satisfaction and equity prices," Journal of Financial Economics, Elsevier, vol. 101(3), pages 621-640, September.
    19. Richard B. Freeman, 1976. "A Cobweb Model of the Supply and Starting Salary of New Engineers," ILR Review, Cornell University, ILR School, vol. 29(2), pages 236-248, January.
    20. David Aboody & Baruch Lev, 2000. "Information Asymmetry, R&D, and Insider Gains," Journal of Finance, American Finance Association, vol. 55(6), pages 2747-2766, December.
    21. Steven N. Kaplan & Mark M. Klebanov & Morten Sorensen, 2012. "Which CEO Characteristics and Abilities Matter?," Journal of Finance, American Finance Association, vol. 67(3), pages 973-1007, June.
    22. Ronald W. Masulis & Cong Wang & Fei Xie, 2007. "Corporate Governance and Acquirer Returns," Journal of Finance, American Finance Association, vol. 62(4), pages 1851-1889, August.
    23. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    24. Ingram, Beth F. & Neumann, George R., 2006. "The returns to skill," Labour Economics, Elsevier, vol. 13(1), pages 35-59, February.
    25. Bebchuk, Lucian Arye & Stole, Lars A, 1993. "Do Short-Term Objectives Lead to Under- or Overinvestment in Long-Term Projects?," Journal of Finance, American Finance Association, vol. 48(2), pages 719-729, June.
    26. David H. Autor & Lawrence F. Katz & Alan B. Krueger, 1998. "Computing Inequality: Have Computers Changed the Labor Market?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(4), pages 1169-1213.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Babina, Tania & Fedyk, Anastassia & He, Alex & Hodson, James, 2024. "Artificial intelligence, firm growth, and product innovation," Journal of Financial Economics, Elsevier, vol. 151(C).
    2. Valeriu Ioan-Franc & Ioan I. Gaf-Deac, 2024. "Participation of Artificial Intelligence in Economic Growth in Romania," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 26(67), pages 944-944, August.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Regier, Matthias & Rouen, Ethan, 2023. "The stock market valuation of human capital creation," Journal of Corporate Finance, Elsevier, vol. 79(C).
    2. Ge, Yao & Qiao, Zheng & Zheng, Hao, 2023. "Local labor market and the cross section of stock returns," Journal of International Money and Finance, Elsevier, vol. 138(C).
    3. Chan, Konan & Lin, Yueh-Hsiang & Wang, Yanzhi, 2017. "Limits-to-arbitrage, investment frictions, and innovation anomalies," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 1-14.
    4. David Hirshleifer & Po-Hsuan Hsu & Dongmei Li, 2018. "Innovative Originality, Profitability, and Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 31(7), pages 2553-2605.
    5. Chan, Konan & Lin, Yueh-hsiang & Wang, Yanzhi, 2015. "The information content of R&D reductions," Journal of Empirical Finance, Elsevier, vol. 34(C), pages 131-155.
    6. Figen Gunes Dogan, 2016. "Non†cancellable Operating Leases and Operating Leverage," European Financial Management, European Financial Management Association, vol. 22(4), pages 576-612, September.
    7. Campbell R. Harvey & Yan Liu & Heqing Zhu, 2014. ". . . and the Cross-Section of Expected Returns," NBER Working Papers 20592, National Bureau of Economic Research, Inc.
    8. Hiroki, Takashi & Iwatsubo, Kentaro & Watkins, Clinton, 2022. "Does firm-level productivity predict stock returns?," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    9. Cao, Zhangfan & Rees, William, 2020. "Do employee-friendly firms invest more efficiently? Evidence from labor investment efficiency," Journal of Corporate Finance, Elsevier, vol. 65(C).
    10. Mikhail Simutin & JessieJiaxu Wang & Lars Kuehn, 2014. "A Labor Capital Asset Pricing Model," 2014 Meeting Papers 695, Society for Economic Dynamics.
    11. Chen, Jian & Tang, Guohao & Yao, Jiaquan & Zhou, Guofu, 2023. "Employee sentiment and stock returns," Journal of Economic Dynamics and Control, Elsevier, vol. 149(C).
    12. Bae, Jaewan & Kang, Jangkoo, 2022. "The negative hiring rate premium on stock returns in the Korean stock market," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    13. Linnenluecke, Martina K. & Chen, Xiaoyan & Ling, Xin & Smith, Tom & Zhu, Yushu, 2017. "Research in finance: A review of influential publications and a research agenda," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 188-199.
    14. Lin, Chaonan & Ko, Kuan-Cheng & Chen, Yu-Lin & Chu, Hsiang-Hui, 2016. "Information discreteness, price limits and earnings momentum," Pacific-Basin Finance Journal, Elsevier, vol. 37(C), pages 1-22.
    15. Cho, Wonho & Kim, Yongjun, 2024. "Labor leverage and firm risk: Evidence from Korea," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).
    16. Chou, Pin-Huang & Ko, Kuan-Cheng & Yang, Nien-Tzu, 2019. "Asset growth, style investing, and momentum," Journal of Banking & Finance, Elsevier, vol. 98(C), pages 108-124.
    17. Jiaju Miao & Pawel Polak, 2023. "Online Ensemble of Models for Optimal Predictive Performance with Applications to Sector Rotation Strategy," Papers 2304.09947, arXiv.org.
    18. Xin Chen & Wei He & Libin Tao & Jianfeng Yu, 2023. "Attention and Underreaction-Related Anomalies," Management Science, INFORMS, vol. 69(1), pages 636-659, January.
    19. Chen, Sheng-Syan & Chen, Yan-Shing & Liang, Woan-lih & Wang, Yanzhi, 2020. "Public R&D spending and cross-sectional stock returns," Research Policy, Elsevier, vol. 49(1).
    20. Xiaoji Lin & Ding Luo & Andres Donangelo & Frederico Belo, 2017. "Labor Hiring, Aggregate Dividends, and Return Predictability in the Time Series," 2017 Meeting Papers 885, Society for Economic Dynamics.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:revfin:v:27:y:2023:i:5:p:1659-1698.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/eufaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.