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George Diepenbrock
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White paper examines why investment analysts largely ignore human capital

Mon, 12/18/2017

 

 

 


 

LAWRENCE — A growing body of research has pointed to the importance of human capital to a business' chances of flourishing, though recent corporate scandals and how Wall Street analysts value firms seem disconnected from that sentiment.

"People who are evaluating stocks don't seem to be paying much attention to that information on human capital," said Clint Chadwick, a KU professor of strategy and human resources management in the KU School of Business. "To the extent that they do pay attention to human capital, it is almost exclusively to the top management team, especially the CEO. But what if a company builds a pipeline to a college where it has not been recruiting before or invests in cross-training its workforce?"

Chadwick, who is also the school's area director of management and entrepreneurship, is co-author of a new white paper — published by the Chartered Institute of Personnel and Development, or CIPD, in London — that is part of a larger project looking at how investors examine the potential of people and human capital in data they use.

"There is mounting research evidence that human capital matters a lot to long-term firm performance," Chadwick said. "But there is not a great deal of evidence that people in the market use measures of human capital to predict the future performance of firms, and we don't have a very good understanding about why they wouldn't do so."

Two potential reasons could involve the culture and incentives surrounding how investors analyze data and possible issues with the type of data, Chadwick said. At play could be potential "herding behavior" among stock analysts, who tend to stick together on their overall evaluations of firms.

"An analyst who sticks her neck out by being different from the herd is more likely to be penalized for being an outlier and being wrong than for sticking with the herd and being wrong," he said.

Chadwick and his co-investigators are also interested in the roles that analysts' personal incentives might play in determining how they value human capital information.

Regarding the data itself, he said it could be costly for investment analysts to acquire detailed data specific to human capital beyond the highest levels of an organization.

"It could be that analysts believe human capital matters a lot, but they think that the value of a human capital in the long term is encapsulated in all these other more tangible short-term measures that they're already using," Chadwick said.

The next phases of the research will include interviews with analysts and a quantitative survey, both as resources to make potential policy recommendations.

"Part of the public policy interest, ideally, is being able to see some reporting standards modified so that firms are more consistently reporting human capital data," Chadwick said. "Human capital can be really valuable. The cutting edge of research is figuring out where and how different kinds of human capital matter for firm performance. We don't have that kind of nuance in most of the easily available information that firms report. In fact, there are reasons to think that our current reporting standards not only underestimate the value of human capital but may push managers to make poorer choices regarding human capital."

For example, in accounting, workforce training is treated as a bottom-line expense as opposed to another type of capital investment, such as purchasing equipment, that falls under rules of amortization.

"Many people suggest that systematically biases firms towards making suboptimal investments in training," Chadwick said.

As part of the white paper, the researchers suggest ways that paying more consideration to human capital could be useful for senior HR leaders, investors and academics, especially in knowledge-based organizations such as in technology-based and financial service industries.

"Every firm likes to say our most valuable asset is our people," Chadwick said. "But for most of them, unfortunately, it's just hot air. We'd like to figure out how capital markets might be able to reward the firms that really do this well, which could help investors, firms and workers."

Video: Chartered Institute of Personnel and Development.

Photo: Pexels.com



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