Firm Efforts to Improve Employee Quality and Corporate Investment Efficiency

Abstract

We examine the effect of firm efforts to improve employee quality via human resource practices on investment efficiency. Employees at all levels of an organization, and executives, play a significant role for efficient corporate investment. Thus, human resource practices that improve employee quality should be associated with efficient corporate investment. However, the outcome of such practices can be controversial, as they are often ineffective, costly, have dis-synergies and deprive other types of investments of funding, which could lead to deviations from optimal investment. Using US firms for the period 2002-2016, our findings reveal that human resource practices are negatively associated with investment efficiency, inducing both over- and under-investment. Results are driven mainly by practices with a more direct cash cost, and are more pronounced with respect to investments in R&D and acquisitions. Overall, our findings are consistent with HR practices targeted at improving employee quality not aligning employees’ and shareholders’ interests, with consequences for investment efficiency.