The valuation implications of human capital in transactions on and outside the exchange

We examine the valuation implications of human capital both for a broad sample of firms and for subsamples of high-technology firms and low-technology firms. Our results suggest that the market appears to value compensation expenses not as expenses but as if they serve as a proxy for a human asset that is omitted from the balance sheets. The findings are consistent with human capital comprising a more sizable portion of the value of high-technology firms than of low-technology firms. The findings also indicate that compensation expenses are valued differently from other expense components of income. Markedly, despite critical differences between investors on the exchange and those buying shares in transactions outside the exchange (controlling interests, information asymmetry, etc.), their assessment of the enhanced value of a firm attributable to human capital is shown to be relatively similar. The results in this study are consistent with compensation expenses creating a valuable intangible asset, hence suggesting that reform in the accounting treatment of these expenses is of critical importance.