HR as cost or investment: The distinction between near- Vs. Longer-term focus of firm valuation

Abstract

This study empirically investigates the myopic approach stock market takes towards human capital investment decisions. Focusing on human capital investment decisions' alignment with short- versus long-term financial motivations of the firm, we examine firms listed in the Financial Times Stock Exchange (FTSE) 100 over a five-year period using an established accounting- based valuation model. The results show that investors of firms that allocate a greater (smaller) portion of value added to their employees will overweight (underweight) forecasted long-term earnings and underweight (overweight) forecasted short-term earnings. The findings challenge the mainstream argument of using human resource expenditure as the primary proxy for firms' human capital investment; rather taking it as an investment that manifests itself in generating future returns.