Personnel is Policy: Labor Investment Efficiency and Firm Value

Abstract

Labor is an essential factor of production. Like many other emerging markets, Korean economy has been developed with heavy reliance on labor over the past few decades, and therefore efficient investment in labor has been of primary interest to Korean companies. We investigate whether and to what extent the labor investment efficiency contributes to firm value in Korea. Following prior studies, we construct an empirical proxy for labor investment efficiency - abnormal changes in the number of employees which deviates from the fitted value based on firm fundamentals. We then find that more deviation from the optimal labor investment is related to lower future operating performance and higher external financing costs (i.e., required rates of returns). We further document that long-term stock performance decreases as the deviation from the optimal labor investment increases. Our results remain unchanged with a battery of robustness checks such as controlling for capital investment efficiency, addressing endogeneity concerns, or using alternative measures of labor investment efficiency. In sum, our results collectively indicate that investment efficiency in human resources indeed significant contributes to firm value.