An analysis of the effect of employee tenure on WACC

Abstract

ABSTRACT No international accounting policy exists to mandate that firms must report employee/workforce-level human capital information on a structured basis. Thus, the link between employee/workforce human capital and firm risk is not demonstrated in the literature. South Korea is a rare instance where human capital information, such as employee tenure is disclosed on Annual Reports as a rule. Therefore, we invoke resource-based theory, a human resource policy assertion, and a business ethics/sustainability inference to show whether capital providers differentiate between firms that are able/unable to retain employees, thus adjusting WACC accordingly. Using OLS regression analysis, from 2011-2020, empirical results show that firms with the ability to retain employees enjoy economically significantly lower levels of WACC. The results infer that equity/debt providers associate workforce tenure and firm risk/returns expectations. Empirical results also show that capital providers are nuanced when impounding employment information into risk/return assessments, based on incrementally different associations for investment-grade/non-investment-grade firms. The study contributes to the literature by providing evidence that management should develop strategies to retain employees to enjoy economic advantages. Because structured employee/workforce human capital information is rare internationally, the study has important practical implications for legislators, management, employees and the public.