Academic Paper Finds That Human Capital Reporting Can Affect Stock Prices

The recently published academic study, Regulated Human Capital Disclosures, available on SSRN, comes to a surprising conclusion. Human Capital disclosures of public companies can have a material impact on short-term share prices. However, the impact is only noticeable in industries in which people are considered material to financial results. Interestingly, the companies most likely to disclose more information on human capital have higher levels of institutional investor ownership.

This paper by Thomas Bourveau, Columbia University - Columbia Business School, Accounting, Business Law and Taxation; students Maliha Chowdhury, Columbia University and Anthony Le, Columbia University, and Ethan Rouen, Assistant Professor, of Harvard Business School finds that human capital disclosures can have a short-term impact on the share prices of public companies in industries in which people are considered material.

The authors write that prior to the 2020 Securities & Exchange Commission rules requiring human capital disclosures beyond the number of employees, “We fail to find any correlation between the disclosure of quantitative metrics and stock returns around the filing date…After regulation, though, we find a robust correlation between the disclosure of quantitative metrics and stock returns. We further show that this correlation is economically and statistically significant only in the sub-sample of industries where SASB (Sustainability Accounting Standards Board) has identified material human capital metrics. Finally, we find that the stock market reaction is significant only for human capital metrics defined as material by SASB and not for other metrics. Collectively, we interpret these combined results as evidence that quantitative human capital disclosures matter to investors, but only in industries where these issues are material and when firms disclose metrics defined as financially material (SASB metrics). Furthermore, the regulation seems to bring some element of comparability that facilitates investors’ consumption of these disclosure.”

The study provides a detailed explanation of the methodology and calculations used to draw its conclusions.

Given that the US Securities & Exchange Commission reportedly is considering new rules on human capital disclosures that could include metrics, the authors believe their “results have regulatory implications.” While they do not specifically advocate for any specific approach to human capital disclosures, "the evidence that stock prices are affected by human capital disclosures at companies in which employees or other stakeholders are particularly material suggests that investors are eager for more disclosures.”

They report “that the regulation seems to improve the comparability of these disclosures. However, our analyses reveal that most firms do not disclose any metrics pertaining to most dimensions of their organizational capital. One interpretation is that not all dimensions of human capital are financially material to all public firms. While this is possible, our analysis of SEC comment letters challenges this interpretation by revealing that many stakeholders demand additional quantitative human capital disclosure. Therefore, another plausible explanation is that a principles-based approach is not sufficient. Given that we are interested not in whether market participants respond to good or bad news, but whether they respond to new disclosures, absolute returns provide a good proxy for response to the new disclosures.”

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