On the Economic Implications of Human Capital Disclosures: Evidence from the SEC’s Mandatory Disclosure Requirements
Date
2024-12-15
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Abstract
This study examines the economic implications of human capital disclosure (HCD) on corporate value. Utilizing a lexicon developed through advanced machine learning techniques, specifically word embedding models, we quantify firm-level HCD by measuring the proportion of discussions dedicated to human capital topics in quarterly earnings conference calls. Our analysis explores how these disclosures influence corporate value, as measured by Tobin's Q.
We leverage the introduction of the Securities and Exchange Commission's (SEC) 2020 amendment to Regulation S-K, which mandates firms to discuss their human capital management practices, as a natural experiment to investigate whether the relationship between HCD and corporate value differs before and after this regulatory change. Additionally, we assess whether the presence of a Chief Human Resources Officer (CHRO) moderates the impact of HCD on firm valuation. We also examine the moderating effects of other governance mechanisms, such as the presence of female directors and female CEOs, on the HCD–corporate value relationship.
Our findings reveal a robust positive association between human capital disclosures and corporate value, indicating that investors value transparency in human capital management. The presence of a CHRO and other governance mechanisms do not significantly alter this relationship. Moreover, the SEC's regulation did not significantly change the impact of HCD on corporate value, suggesting that investors may have already incorporated human capital considerations into their evaluations prior to the mandate.
These insights contribute to the broader discourse on corporate transparency and accountability, highlighting the strategic importance of human capital disclosures in enhancing corporate value and informing stakeholder engagement.
Description
This thesis advances the understanding of human capital disclosure (HCD) by addressing critical gaps in existing research. Prior studies have predominantly examined HCD within 10-K filings following the SEC’s 2020 Regulation S-K amendment, often limited by staged preparation biases and a narrow post-regulation timeframe. This research shifts the focus to earnings conference calls (ECs), leveraging their dynamic and transparent nature as a medium for measuring HCD. By applying advanced textual analysis and machine learning-developed lexicons, it quantifies firm-level disclosures with greater precision and immediacy.
The study investigates the economic implications of HCD on corporate value, employing Tobin’s Q and alternative performance metrics to ensure a comprehensive evaluation. Results demonstrate a robust positive relationship between HCD and corporate value, independent of governance factors such as the presence of Chief Human Resources Officers (CHROs) or female leadership. Furthermore, the findings suggest that the SEC’s regulatory amendment had minimal additional impact, indicating that investors had already integrated HCD into their assessments prior to the mandate.
By bridging methodological and temporal gaps, this thesis underscores the strategic importance of HCD in enhancing corporate transparency and value creation. Its findings contribute valuable insights for academics, practitioners, and policymakers, highlighting the role of HCD in shaping investor perceptions and corporate accountability.
Keywords
Human Capital Disclosure (HCD), Regulation S-K 2020 Amendment, Economic Implications, Chief Human Resources Officer (CHRO), Governance Mechanisms