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Changes in the value implications of compensation costs throughout the economic cycle: an examination of high-tech versus low-tech industries

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  • Ilanit Gavious
  • Yaron Lahav
  • Meir Russ

Abstract

This study explores whether and how the value implications of compensation costs change throughout the economic cycle. Given that we are dealing with the human aspect of the intangibles that drive the value created by a company, it is not obvious what impact the ‘boom’ and ‘bust’ phases of the economic cycle will have on investor valuations of this primary component of a company’s investment in human capital (HC). Our results reveal that economic cycles have a substantial immediate impact on the value implications of compensation costs. Specifically, these value implications increase significantly during upticks in the economy and decline in the downturns, in high-tech as well as low-tech firms. Notwithstanding, the value implications of compensation costs are consistently higher for high-tech firms. Furthermore, the changes in value implications for high-tech firms throughout the economic trends are more volatile than those observed for low-tech firms. When differentiating between investors on and outside the exchange, we find consistently stronger value implications of compensation costs for the latter. It seems that throughout the economic cycle more informed and sophisticated investors have a higher assessment of the role of a firm’s investment in HC in value creation. Another important implication of our results is that, in response to economic changes, investors modify their valuations of HC quickly rather than gradually, which is unexpected given the strategic value and complexity of the human aspect of the firm’s intangibles.

Suggested Citation

  • Ilanit Gavious & Yaron Lahav & Meir Russ, 2016. "Changes in the value implications of compensation costs throughout the economic cycle: an examination of high-tech versus low-tech industries," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 23(2), pages 200-223, June.
  • Handle: RePEc:taf:raaexx:v:23:y:2016:i:2:p:200-223
    DOI: 10.1080/16081625.2015.1057189
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    References listed on IDEAS

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    Cited by:

    1. Meir Russ, 2017. "The Trifurcation of the Labor Markets in the Networked, Knowledge-Driven, Global Economy," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 8(2), pages 672-703, June.

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