The HRM–capital market link: Effects of securities analysts on strategic human capital

• Author: Achim Krausert
• Date: 01 January 2018
• DOI: http://doi.org/10.1002/hrm.21841
• Published date: 01 January 2018

HR SCIENCE FORUM

The HRM–capital market link: Effects of securities analysts on

strategic human capital

Achim Krausert

University of Warwick, Coventry, England

Correspondence

Achim Krausert, Warwick Business School,

University of Warwick, Coventry CV4 7AL,

UK.

Email: achim.krausert@wbs.ac.uk

This article develops theory about an agency problem affecting the strategic human capital

(SHC) of the firm. It proposes three categories of SHC-related choices managers must make

that imply a trade-off between near- and long-term performance. Dispersed shareholding, firm

coverage by securities analysts, and their practice of publishing quarterly earnings forecasts are

argued to entail a bias in management incentives, shifting the balance in this trade-off toward

near-term performance. To restore the balance, securities analysts would need to distinguish

transitory from recurring effects of SHC-related choices in their valuation models (e.g., treating

certain labor cost savings during cyclical downturns as transitory). Restoring the balance would

also require them to anticipate long-term effects in their long-term earnings forecasts

(e.g., long-term positive effects of retaining employees with valuable skills during cyclical down-

turns). The article discusses specific transitory cost effects and long-term effects they could

potentially take into account. The skills and incentives needed by analysts to account for such

effects are argued to vary across firm segments.

KEYWORDS

agency theory, corporate governance, financial analysis, high-performance work systems,

human capital disclosure, intangibles, intellectual capital disclosure, nonfinancial information,

securities analysts, short termism, strategic human capital, temporal effects

1|INTRODUCTION

Recent research has become increasingly concerned with influences

of the capital market on the strategic human capital (SHC) of the firm.

Krausert (2014) argued that near-term earnings pressure from the

capital market may affect decisions to invest in high-performance

work systems (HPWSs) given that their implementation incurs near-

term costs while beneficial effects are lagging (HPWSs constituting a

type of SHC investment). Liu, van Jaarsveld, Batt, and Frost (2014)

found that firms tend to invest less in HPWSs if they are owned by

transitory investors (such as hedge funds). Krausert (2016) argued

that SHC-related short termism would be mitigated if managers were

able to credibly communicate to the capital market about long-term

effects of SHC investments. Bassi and McMurrer (2005); Benson,

Young, and Lawler (2006); and Edmans (2011) all found that SHC

investments are associated with positive earnings surprises, implying

that they should be of interest to investors in the capital market. Tar-

geting investors, Ulrich (2015) proposed a framework of leadership-

and SHC-related factors that impact on performance and, hence,

could be attended to by them. Krausert (2015) developed a model of

the timing of training effects, proposing training activities with long-

term effects that could be of interest to investors. Additionally, anec-

dotal evidence and qualitative research suggest that attention to SHC

in the capital market has, to date, been sporadic, that investors are

increasingly interested in SHC but that they are uncertain about how

to take it into account (Benson et al., 2006; Chartered Institute of

Personnel and Development [CIPD], 2015; Hendry, Woodward,

Harvey-Cook, & Gaved, 1999; Jacobs, 2015; Ulrich, 2015).

SHC is the firm’s stock of knowledge, skills, abilities, psychological

traits and states, networks, social trust, structures, processes, routines,

norms, values, and beliefs that make a difference for firm performance

and that can be influenced through HRM. It is well established that

investments in SHC generally have a positive effect on company perfor-

mance (Combs, Liu, Hall, & Ketchen, 2006; Jackson, Schuler, & Jiang,

2014). The above, emerging strand of literature suggests “in broad brush

strokes”that SHC investments may be affected by earnings pressure

DOI: 10.1002/hrm.21841

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