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Publications
  • April 2023
  • Article
  • Journal of Corporate Finance

The Stock Market Valuation of Human Capital Creation

By: Ethan Rouen and Matthias Regier
  • Format:Print
  • | Pages:20
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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 f ind 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 valueweighted (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; Valuation; Human Capital; Investment Return

Citation

Rouen, Ethan, and Matthias Regier. "The Stock Market Valuation of Human Capital Creation." Art. 102384. Journal of Corporate Finance 79 (April 2023).
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About The Author

Ethan C. Rouen

Accounting and Management
→More Publications

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