Firm Efforts to Improve Employee Quality and Corporate Investment Efficiency

Abstract

Using agency theory, in this study we examine the effect of systems of human resource practices on investment efficiency, where investment takes the form of purchase of buildings or plants, investments in R&D and acquisitions. We argue that employees at all levels of an organization play a significant role in efficient corporate investment. Thus, human resource systems aimed at improving employee quality should be associated with efficient corporate investment. However, the outcome of such systems can be controversial, as they are often ineffective, costly, have dis-synergies and deprive other types of investments of funding, which could lead to deviations from optimal investment. Using U.S. firms for the period 2002-2016, our findings reveal that systems of human resource practices are negatively associated with investment efficiency, inducing both over- and under-investment. Results are driven mainly by an HR system with a more direct cash cost, and are more pronounced with respect to investments in R&D and acquisitions. Overall, our findings are consistent with human resource systems not aligning employees’ and shareholders’ interests, with consequences for investment efficiency.