This study examines the disclosure of labor-related costs by US firms, and estimates the proportion of these costs that are valued as an asset (human capital) by the market. Separate identification of labor-related costs in US financial reports is voluntary, and is made consistently only by about 10% of all US Compustat firms. The probability of disclosure is found to be positively related to firm size, labor intensity and membership in regulated industries and is inversely related to industry concentration.Using a modification of Ohlson's (1995) framework the study finds that on average about 16% of all such costs are valued by the market as an investment in human capital, and that this human capital asset amortizes at a rate of about 34% per year. Further, the human capital asset averages about 5% of the total market value of the firm and accounts for about 16% of the difference between market and book value. The ratio of the human capital asset to market value is found to be positively related to average salary paid to employees, operating uncertainty, and the ratio of labor expenses to sales, but inversely related to the firm's size. Labor Costs and Investments in Human Capital AbstractThis study examines the disclosure of labor-related costs by US firms, and estimates the proportion of these costs that are valued as an asset (human capital) by the market. Separate identification of labor-related costs in US financial reports is voluntary, and is made consistently only by about 10% of all US Compustat firms. The probability of disclosure is found to be positively related to firm size, labor intensity and membership in regulated industries and is inversely related to industry concentration.Using a modification of Ohlson's (1995) framework the study finds that on average about 16% of all such costs are valued by the market as an investment in human capital, and that this human capital asset amortizes at a rate of about 34% per year. Further, the human capital asset averages about 5% of the total market value of the firm and accounts for about 16% of the difference between market and book value. The ratio of the human capital asset to market value is found to be positively related to average salary paid to employees, operating uncertainty, and the ratio of labor expenses to sales, but inversely related to the firm's size. 4
This study utilizes firm-specific time-series data to estimate the economic value of the research and development (R&D) expenditures that investors consider an asset to the firm. The study uses a modification of the Ohlson (1995) model to estimate the persistence of abnormal earnings, the proportion of current R&D expenditures that represents a source of future benefits to the firm and the amortization rate of that asset. The parameters are estimated from time-series data of market and book values of equity, earnings and R&D expenditures. The study further compares the firm-specific estimates with those resulting from an application of a cross-sectional estimation procedure based on all available companies in the sample and industry-specific sub-samples. Results indicate the existence of significant differences in some two-digit SIC code industries between the time-series and the cross-sectional estimates of the parameters and the economic value of the R&D asset. Differences in the capitalization parameter are associated with the growth in R&D, the profitability of the firm, R&D intensity and the concentration of the industry. Differences in the persistence of earnings are related to the concentration ratio. Finally, differences in the estimated economic value of the R&D asset are associated with the profitability of the company as measured by its return on assets. We further compare the associations between the three different estimates of the R&D asset and subsequent stock returns, as well as the contemporaneous difference between the market and book value of companies. Results indicate that the time-series estimates of the R&D asset show stronger associations with both variables, followed by the intra-industry and the cross-industry cross-sectional estimates. Overall, our results provide evidence that market participants behave as if R&D expenditures have significant future economic benefits to the firm, and show that the cross-sectional and time-series approaches followed when assessing its economic value provide significantly different estimates.
This study examines the selective disclosure of labor-related costs by U.S. firms and estimates the proportion of these costs that the market values as an investment in human capital. Labor-related costs are separately identified in the financial reports of only a small fraction of all U.S. Compustat firms. Larger firms, firms in industries that are regulated, are more labor-intensive, and have relatively little competition are more likely to report these costs voluntarily. Using a modification of the residual income valuation framework with a sample of firms that consistently disclosed their labor-related costs, the study finds that for these firms about 16 percent of all such costs represent an investment in human capital, and that about a third of this asset depreciates annually. Further, the human capital asset averages about 5 percent of the total market value of the firm and accounts for about 16 percent of the difference between market and book value. The ratio of the human capital asset to market value is found to be positively related to operating uncertainty, industry concentration, and industry-adjusted average compensation paid to employees. The human capital asset is also positively associated with analysts' long-term forecasts of earnings.
This study estimates individual-firm style loadings for classification of individual securities into growth (glamour) and value groups. Style loadings are similar to betas, measuring the comovement of a firm's return with the return on a particular style index. The study examines this classification by comparing the extent of unrecorded economic assets for growth and value firms. The study also examines the systematic-risk characteristics associated with this classification. Using Ohlson's (1995) valuation model, this study estimates the persistence of abnormal earnings for individual firms using time-series analysis. Growth firms are shown to have higher levels of abnormal earnings persistence than value firms, probably due to their greater levels of unrecorded economic assets than value firms. Indeed, the study finds that growth firms have greater levels of R&D and advertising intensity than value firms. The study also shows that growth and value firms differ in their systematic risk. Possibly due to the greater uncertainty associated with unrecorded economic assets, the systematic risks of growth firms are larger than those of value firms.
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