Human capital matters: Market valuation of firm investments in training and the role of complementary assets

• Author: Shawn M. Riley,Joseph T. Mahoney,Steven C. Michael
• Date: 01 September 2017
• Published date: 01 September 2017
• DOI: http://doi.org/10.1002/smj.2631

Strategic Management Journal

Strat. Mgmt. J.,38: 1895–1914 (2017)

Published online EarlyView 13 February 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2631

Received 26 July 2012;Final revisionreceived 10 November 2016

HUMAN CAPITAL MATTERS:MARKET VALUATION OF

FIRM INVESTMENTS IN TRAINING AND THE ROLE

OF COMPLEMENTARY ASSETS

SHAWN M. RILEY,1STEVEN C. MICHAEL,2*and JOSEPH T. MAHONEY2

1Department of Business Administration, College of Business, Kutztown University

of Pennsylvania, Kutztown, Pennsylvania, U.S.A.

2Department of Business Administration, College of Business, University of Illinois,

Urbana-Champaign, Illinois, U.S.A.

Research summary: This article empirically examines the economic value to rms of investing in

the training of their employees and rm-level factors that inuence how much the rms benet.

Event study methodology is used to obtain a measure of the economic impact of information

regarding a rm’s human capital management investments and policies. Subsequent regression

analyses are then used to test hypotheses regarding possible complementary relationships

between rm-level factors and human capital investments. Results provide robust support for

the proposition that effective investments in human capital and training matter, and that these

human capital investments aremore impactful when combined with complementary assets of R&D,

physical capital, and advertising investments.

Managerial summary: Do rm investments in training and the development of employee human

capital matter with regardto nancial performance? We nd that, yes, these investments do matter.

Our results show that managers who view employee human capital as an asset to be invested in

and developed can expect to outperform those who view it as a cost to be minimized. In addition,

we nd that these human capital investments will be of even greatereconomic value to rms when

they have made complementary investments in R&D, physical capital,and advertising. Copyright

© 2016 John Wiley & Sons, Ltd.

INTRODUCTION

In the resource-based approach, a rm’s valuable,

rare, inimitable, nonsubstitutable, and organization-

ally embedded resources can result in a rm’s supe-

rior nancial performance (Barney, 1991; Peteraf,

1993; Wernerfelt,1984). Investments in human cap-

ital are potential candidates for such resources. The

Keywords: complementary assets; general training;

human capital; market frictions; resource-based approach

*Correspondence to: Steven C. Michael, Department of

Business Administration, College of Business, 1206 S Sixth

Street, University of Illinois, Urbana-Champaign, IL 61822,

U.S.A. E-mail: smichael@illinois.edu

Copyright © 2016 John Wiley & Sons, Ltd.

human capital embodied in employees— whether

at the individual, team, or organizational level—is

intangible and often tacit in nature (Grant, 1996;

Reed & DeFillippi, 1990), which can therefore lead

to imitation barriers (Rumelt, 1984) and to a rm’s

superior economic performance (Amit & Schoe-

maker, 1993; Chadwick & Dabu, 2009; Makadok,

2001).

Many rms choose to develop human capital

through training employees. Existing research sug-

gests that such investmentsare likely to lead to supe-

rior nancial performance when the human capital

is rm-specic (Coff & Rafee, 2015; Crook, Todd,

Combs, Woehr, & Ketchen, 2011; Mayer, Somaya,

1896 S. M. Riley, S. C. Michael, and J. T. Mahoney

& Williamson, 2012; Wang,He, & Mahoney, 2009).

In contrast to rm-specic human capital, how-

ever, general training, dened as building human

capital in the employee that has value both to the

training rm and to other rms, is not expected to

improve the training rm’s nancial performance

because of the rm’s inability to capture the value.

Specically, general training would be a nancial

drain on the training rm while enabling mobility of

the employee (Becker, 1964). General training thus

fails the test of valuable, rare, inimitable, nonsub-

stitutable, and organizationally embedded (Barney,

1991; Grant, 1996).

We respectfully dissent from this conventional

wisdom. Recent theoretical developments highlight

labor market frictions that create the possibility of

sustainable competitive advantage through train-

ing and other human capital investments (Camp-

bell, Coff, & Kryscynski, 2012; Molloy & Bar-

ney, 2015). The extent of such market frictions

and their nancial effects is an empirical question.

The current article examines empirically whether

effective investments in general training can ben-

et rms nancially, and if so, what factors inu-

ence the variance in their nancial returns. Using

a novel data set, we examine rms identied by

industry experts for excellence in training, and

we employ event study methodology to determine

the abnormal stock market returns to rms fol-

lowing their placement on the annual “Training

Top 125” award list published by Training maga-

zine. To address the second question, we analyze

those abnormal returns to explain their variance

using measures of complementary assets collected

from Compustat and other sources. To preview

our empirical results, rms that engage in supe-

rior training efforts do receive signicant nancial

returns, and the variance in these nancial returns

is affected by the rms’ investments in the com-

plementary assets of R&D, physical capital, and

advertising.

This program of research is important to theory

and practice. As noted above, historically theory

has predicted little or no economic prots (i.e., no

positive economic returns above the opportunity

cost of capital) to investments in general training

and human capital. At a practical level, returns

to training drive corporate decision-making,

and evidence of positive returns has been

lacking. As a leading publication, Training,

notes:

Training long has been seen as a feel-good

profession dealing with warm and fuzzy

intangibles such as learning and knowledge.

But sales, marketing, operations— those

types of bottom-line-oriented departments

buoy the company up in the rough seas of

competition and economic hard times. At

least, that’s been the general opinion out

there— if not clearly stated, then implied.

Training departments have had to ght for

their place in the corporate boardroom and

budget. Even in economic booms, it has

been difcult for trainers to squeeze enough

blood from the corporate stone to implement

the latest and greatest training technology,

continuing education programs, or any other

training initiative you could name. That’s

because there has been little solid data to

prove the return on investment(ROI) for those

initiatives. Corporate higher-ups want to see

hard numbers that outline any expense’s

ROI, and it’s difcult to quantify the value of

learning and knowledge (Webb, 2008).

This research offers such “hard numbers.”

LITERATURE REVIEW

Human capital theory (Becker, 1964) posits that

human capital investments in the training and edu-

cation of employees can have positive economic

value because they develop and nurture the knowl-

edge and skills of these employees, thereby improv-

ing their productivity. Such a denition of human

capital includes formal education, work experi-

ence, workplace instruction, and on-the-job train-

ing (Miller, Xu, & Mehrotra, 2015; Shaw, Park,

& Kim, 2013). Consistent with theory, invest-

ments in human capital have been shown to posi-

tively inuence productivity-related measures (Bar-

tel, 1994; Ichniowski, Shaw, & Prennushi, 1997;

Lepak & Snell, 1999; Sepulveda, 2010). However,

whether these human capital investments have a

positive impact on rms’ nancial performance is

unclear (Almeida & Carneiro, 2009; Bartel, 2000;

Frank & Obloj, 2014; Jones, Kalmi, & Kauhanen,

2012).

The rm is expected to capture at least some

of the economic returns from productivity gains

when the human capital is rm-specic (Coff, 1997;

Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 1895–1914 (2017)

DOI: 10.1002/smj