Premium
Human capital cost and investment policy
Author(s) -
Ji Shuangshuang,
King TaoHsien Dolly,
Li Xinxin
Publication year - 2021
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1002/rfe.1104
Subject(s) - investment (military) , human capital , cost of capital , fixed investment , economics , physical capital , economic capital , return of capital , monetary economics , capital (architecture) , business , return on investment , microeconomics , labour economics , financial capital , capital formation , investment performance , market economy , production (economics) , profit (economics) , archaeology , politics , political science , law , history
In this paper, we examine the link between human capital cost and investment policy. We find a significantly positive relationship between investment risk and the cost of human capital measured by average employee pay, especially when employees have strong bargaining power. We further investigate various channels through which investment risk influences human capital cost and find strong empirical support that these channels are important drivers. Our results suggest that a higher human capital cost associated with an increase in investment risk discourages firms from making valuable but risky investments in the future, leading to a potential problem of underinvestment.