Employee competency, diversity, and firm value

• Published date: 01 April 2023
• Author: Linh Le,Dongfang Nie,Anh Ta,Victor Prybutok
• Date: 01 April 2023
• DOI: http://doi.org/10.1002/jcaf.22599

Received:  April  Revised:  September  Accepted:  October 

DOI: ./jcaf.

RESEARCH ARTICLE

Employee competency, diversity, and firm value

Linh Le1Dongfang Nie2Anh Ta3Victor Prybutok4

College of Business, University of

Nebraska Omaha, Omaha, Nebraska, USA

Department of Accounting, Finance, &

Economics, College of Business,

University of Texasof the Permian Basin,

Odessa, Texas,USA

Department of Management, College of

Business Administration, University of

Nebraska Omaha, Omaha, Nebraska, USA

Department of Information Technology

and Decision Sciences, College of

Business, University of North Texas,

Denton, Texas, USA

Correspondence

Dongfang Nie, Department of

Accounting, Finance, & Economics,

College of Business, University of Texasof

the Permian Basin, TX, USA.

Email: nie_d@utpb.edu

Abstract

The relationship between employee quality and firm outcomes is extensively

explored in the literature. Prior research focuses on examining the quality of

top managers in a limited number of industries or using smaller datasets. This

study fills this literature gap using demographic characteristics from Metropoli-

tan Statistical Areas, where firm headquarters are located as a proxyfor employee

quality. The findings show that firms with high employee quality in terms of

employee competency and diversity exhibit higher firm value. The results show

that ensuring the availability of an educated and diverse workforce provides

long-lasting firm value.

KEYWORDS

employee quality, employee competency, employee diversity,f irm value,metropolitan statisti-

cal areas, employee competency,diversity, firm value

1 INTRODUCTION

The importance of competency and diversity of top man-

agers in different firm outcomes is the focus of numerous

human capital studies (e.g., Ahmed & Ali, ; Ararat

et al., ; Bogers et al., ; Erhardt et al., ;Huang

&Hilary,; Kilduff et al., ; Perryman et al., ;

Zona et al., ). However, a research gap exists on

whether workforce competency and diversity have a sig-

nificant impact on firm value. This gap exists despite

the practice of companies in addressing the importance

of their employees in their vision, mission, and annual

reports (Barney & Wright,). In addition, prior research

has examined the relationship between employee qual-

ity and firm outcomes. Crook et al. () confirm the

strongly positive association between different character-

istics of human capital and firms’ outcomes via meta-

analyzing  survey-based studies in human capital liter-

ature. At the managerial level, Ararat, Aksu & Cetin ()

confirm the association between firm performance and

demographic diversity of top management teams. Call

et al. () provide empirical evidence to show that highly

educated human capital is strongly associated with better

financial reporting quality. Dixon-Fyle et al. ()show

that both gender and ethnic diversity on executive teams

enhance firms’ financial performance via a large data set of

 companies in  countries. However, the association

between employee quality of the general workforce and

firm value remains understudied. This study is the first to

examine the influence of employee quality on firm value.

In this research, the firm’s employee quality is measured

using both employee diversity and employee competency.

Based on prior literature it is expected that employee

diversity positively influences firm value. A diverse work-

force provides divergent views that allow improving daily

operations (Ellis & Keys, ; Richard, ; Richard

et al., ). The diverse workforce also cultivates a more

open and innovative culture (Hewlett et al., ). Con-

sistent with these studies, it is anticipated that diversity

promotes firm innovation. Prior research on how diversity

J Corp Account Finance. ;:–. ©  Wiley Periodicals LLC. 109wileyonlinelibrary.com/journal/jcaf

110 LE  .

affects firm value has largely focused on the diversity of the

top management team. Some papers investigate the diver-

sity of the board and top management team in the context

of gender (Adams & Ferreira, ; Campbell & Mínguez-

Vera , ;Carteretal.,; Coffey & Wang, ; Erhardt

et al., ; Liu et al., ) while others focus on national

and cultural diversity (Nielsen & Nielsen, ; Tallman &

Li, ). These research findings show that a diverse top

management team enhances many aspects of operations

and as a result firm value. In addition, Ng and Sears ()

show the importance of perceived CEO commitment to

actual diversity management practices at the organization

level. However, we know little about the impact of the

diversity of the general workforce on firm value. The posi-

tion in this research is that a diverse workforce creates

value by building a more dynamic and innovative working

environment. While the management team is primarily in

charge of the key firm decisions, the employees make deci-

sions at lower levels and provide internal information and

feedback to the top management team. This study fills a

void in the current literature by examining the effect of the

workforce ethnic and gender diversity on firm value.

Besides employee diversity, employee competency is

another crucial characteristic of the workforce. Managers

rely on internal financial information from their work-

force to make decisions. High quality internal financial

information leads to better operational efficiency and firm

value (Baik et al., ; Cheng et al., ). Internal finan-

cial information frequently originates from lower-level

managers and employees. As highly educated employees

potentially make fewer unintentional errors, they pro-

vide high-quality internal information, thus resulting in

better financial performance (Call et al., ). There-

fore, we hypothesize the association between employee

competency and firm value is positive.

In this research, the proxy for employeecompetency and

employee diversity is the level of education and diversity of

the workforce in the Metropolitan Statistical Area (MSA)

where the firm is headquartered. Our results show that

the MSAs that have both the highest educational levels

and greatest diversity are Silicon Valley, San Francisco, and

Washington DC. These results show that firm headquar-

ters in these MSAs have a greater ability to hire quality

employees, as defined by degree attainment and diver-

sity. A review of the prior literature suggests that such

employees enhance firm value. Similarly, we anticipate

that as the educational level and diversity of the popu-

lation in an MSA decrease, the quality of the employees

that are available will also decrease. The data from the

United States Census Bureau’s American Community Sur-

vey (USCBACS) are used to acquire the average education

level and demographic information of each MSA. While

the data for average education level can be used directly

from the database, we employ Shannon’s diversity index

to measure the level of diversity in an MSA. This diver-

sity index is commonly used in biodiversity literature. It

captures both the abundance and evenness of the eth-

nicities in a region.The measure of employee quality

determined using the USCBACS is considered alongside

firm value determined by Tobin’s Q. After controlling for

several MSA-level characteristicsand firm-specific char-

acteristics, it was found that both the average education

and diversity level of a firm’s workforce are positively

related to Tobin’s Q. These results show that firms with

high employee competency and employee diversity exhibit

higher firm value. Our results are also confirmed by

employing an alternative measure of Tobin’s Q and a

different employee diversity index, the Blau index.

The study contributes to the literature examining the

association between human capital and firm outcomes.

Most prior studies focus on top management character-

istics and their impact on different firm outcomes such

as openness (Bogers et al., ), innovation (Zona et al.,

), performance (Ararat et al., ; Erhardt et al.,

;Huang&Hilary,; Kilduff et al., ; Perry-

man et al., ), and stock liquidity (Ahmed & Ali, ).

While there is no doubt that managers play an important

role in the firm value, employees also contribute to firm

value by providing information to managers and success-

fully implementing policies. Prior archival research has

not examined the relationship between employee quality

and firm value, which is because of the difficulty in directly

measuring employee quality. For example, the total num-

ber of employees in Fortune  companies encompasses

.% of the US workforce (Donnelly, ). While many

companies emphasized the importance of diversity to the

work environment and performance, only .% of the

Fortune  companies fully disclose their diversity data

(Donnelly, ). Because the data on employees are not

available, it is a valuable first approach to use other mea-

sures for evaluating the importance of quality employees

in the workplace. In this research, we use the alternative

but related measures of the educational level and diver-

sity available in the local region as measured by the MSA

in which the firm headquarters is found as measures for

the likelihood of employee quality. The current research

is the first to examine the relationship between overall

employee quality and firm value. The use of a large sam-

ple of firms and industries and the unique applications and

findings in this work make it an important contribution to

the literature.

The study also contributes to the emerging litera-

ture on the relationship between Metropolitan Statistical

Area (MSA) characteristics and various firm outcomes.

For example, Beck et al. () find a positive relation-

ship between MSA average education level and average

education level at accounting firms’ lead engagement

office and audit quality. Mcguire et al. () show that