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

Abstract

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 downturns). 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. K E Y W O R D Sagency 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

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