Value relevance of human capital information
| Pages | 325-345 |
| Date | 12 April 2013 |
| Published date | 12 April 2013 |
| DOI | https://doi.org/10.1108/14691931311323913 |
| Author | Ramin Gamerschlag |
| Subject Matter | Accounting & finance,HR & organizational behaviour,Information & knowledge management |
Value relevance of human
capital information
Ramin Gamerschlag
Chair of Management and Control, Go
¨ttingen University, Go
¨ttingen, Germany
Abstract
Purpose – The purpose of this paper is to investigate if human capital infor mation voluntarily
provided by German companies is value-relevant.
Design/methodology/approach – By means of word-based content analysis, human capital
information is extracted from German companie s’ annual reports. Subsequently, the value
relevance of the disclosed human capital information is analyzed by applying two established
valuation models.
Findings – The results show that human capital information is value-relevant. Especially,
information on qualification and competence issues is positively associated with firm value.
Nonetheless, the disclosed information does not lead to short-term changes in market value.
Consequently, human capital information is value-relevant but not immediately.
Practical implications – First, companies can improve their valuation on the capital market by
disclosing information on their human capital. Second, standard setters can use this paper’s results in
defining relevant information categories for human capital disclosures. Third, the amount of human
capital disclosures is increasing over time.
Originality/value – This study explicitly evaluates the value relevance of the overall (especially
nonfinancial) human capital information voluntarily provided in cor porate annual reports.
Keywords Human capital, Content analysis, Value relevance, Voluntary disclosure, Germany,
Annual reports, Corporate governance
Paper type Research p aper
1. Introduction
In our knowledge-based economy, successful companies’ most impor tant assets are
intangible (e.g. Edvinsson and Malone, 1997; Lev, 2001; Stewart, 1997). Especially an
organization’s human capital can be regarded as a valuable resource and as a key
factor for sustainable competitive advantages (Gu
¨nther et al., 2003; Huselid, 1995;
Pfeffer,1994 ; Prahalad and Hamel, 1990; Wright et al., 1994, 2001). However, companies
only disclose limited information on this resource. A reason might be incomplete legal
regulations in the field of human capital disclosures. Consequently, investors and
other stakeholders cannot fully ascertain their investment objects’ value-adding
potential (Lev and Zarowin, 1999). The results are information asymmetries between
internal and external parties, agency and transaction costs, as well as possible market
inefficiencies (An et al., 2011; Healy and Palepu, 2001).
Efficient capital market theory suggests that share prices always reflect all publicly
available information (Fama, 1970, 1991; Fama et al., 1969)[1]. Therefore, investors,
analysts, and other capital market participants factor the available information into
decisions on whether or not to buy or to sell the relevant firm’s stocks (Abhayawansa
and Guthrie, 2012; Acland, 1976; Lev, 2001; Wyatt, 2008). Consequently, it can be
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1469-1930.htm
Received 14 October 2012
Accepted 23 October 2012
Journal of Intellectual Capital
Vol.14 No. 2, 2013
pp. 325-345
rEmeraldGroup Publishing Limited
1469-1930
DOI 10.1108/14691931311323913
Revised version of manuscript JIC-Mar-2012-0021; the paper has been part of the author’s
dissertation thesis.
325
Human capital
information
assumed that investors will use human capital information for their investment
decisions if this information will be regarded as relevant and reliable; that is, human
capital information will be assum ed value relevant.
The value relevance of disclosures on intangible assets – and human capital – has
been the focus of several previous studies (for an overview see Striukova et al., 2008;
Wyatt, 2008). Most of these have focussed on intangible assets in general. Thus,
they also considered information on companies’ structural (inter nal) and relational
(external) capital (e.g. Abdolmohammadi, 2005; Barth et al., 2001; Canibano et al., 2000;
Holthausen and Watts, 2001; Lev, 2001; Maines et al., 2002, 2003; Schiemann and
Gu
¨nther, 2007; Uyar and Kilic, 2012; Vafei et al., 2011; Wang, 2008). The studies that
solely focussed on human capital disclosures mostly considered very special aspects
of such disclosures, for instance employee stock option costs or info rmation on
managerial skills. As yet, no study has explicitly evaluated the value relevance of the
overall (especially nonfinancial) human capital information provided in corporate
annual reports.
The purpose of this paper is to find out if capital markets value voluntarily
disclosed human capital information, and – if so – which specific info rmation is value
relevant. Against this background, a human capital disclosure index is constr ucted.
It is based on data which have been extracted from corporate reports by means of
content analysis. Subsequently, established valuation models are being used for
analyzing whether the disclosed human capital information is reflected in share price.
Furthermore, it is investigated if the disclosed human capital info rmation leads to
short-term changes in share price.
The results of the analysis show that human capital information is value relevant.
Especially information pertaining to quali fication and competence issues is positively
associated with firm value. However, disclosure of human capital info rmation does not
cause any changes in share price within the analyzed time frame. Hence, human capital
information is value relevant but not immediately.
The study at hand contributes to a better understanding of human capital
disclosure and its implications for capital markets.
First, it contributes to understanding the role that (voluntary) disclosures play in
capital markets: the provision of human capital information helps to reduce
information asymmetries arising between the firm and the capital market; if investors
receive the demanded human capital information, they can better evaluate the
disclosing company’s financial condition (Healy and Pale pu, 2001; Leuz and
Verrecchia, 2000).
Second, this study contributes to human capital theories by helping to identify
human capital’s primary components. The positive valuation of qualification and
competence issues is in line with human capital theories; they also focus on these issues
(see Blaug, 1976).
Finally, the study helps to identify the information that such disclosures have to
offer their addressees for reducing potential information asymm etries (Healy and
Palepu, 2001). This could be of interest to stand ard setters when they define what
information companies should disclose on human capital issues.
The paper is structured as follows: in Section 2, the relevant theory is reviewed and
the hypothesis to be tested is derived. Section 3 contains the study design and
methodology. Section 4 presents the results, as well as a discussion and interpretation
of these. The study concludes with a summary, a description of its limitations, and an
outlook for further research.
326
JIC
14,2
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