SciELO - Scientific Electronic Library Online

vol.18 issue4Cointegration and stock market interdependence: Evidence from South Africa, India and the USAValue relevance and corporate responsibility reporting in the South African context: An alternate view post King-III author indexsubject indexarticles search
Home Pagealphabetic serial listing  

Services on Demand



Related links

  • On index processCited by Google
  • On index processSimilars in Google


South African Journal of Economic and Management Sciences

On-line version ISSN 2222-3436
Print version ISSN 1015-8812

S. Afr. j. econ. manag. sci. vol.18 n.4 Pretoria  2015 



An industry analysis of the power of human capital for corporate performance: Evidence from South Africa



Carla Morris

School of Accountancy, Stellenbosch University




Even in industrialised emerging economies, the value-generating competencies of a workforce, known as its human capital efficiency, are a key resource for commercial success. The objective of this research is to empirically investigate the relationship between human capital efficiency (as measured by value-added human capital) and the financial and market performance of companies listed on the Main Board and Alternative Exchange (ALT-X) of the Johannesburg Stock Exchange. Return on assets, revenue growth and headline earnings per share were used as financial performance indicators; while market-to-book ratio and total share return were used to measure market performance. Multivariate regressions were performed, with panel data covering 390 companies in the financial, basic materials, consumer services, consumer goods, industrial and technology industries from 2001 to 2011. First, human capital efficiency was found to have no effect on the market performance of listed companies in South Africa. Secondly, higher human capital efficiency was found to result in the extraction of greater returns from both tangible and intangible assets in all industries. Thirdly, higher profitability was found to be associated with higher human capital efficiency in almost every industry in South Africa, with the exception of the technology industry, where human capital efficiency was found to be independent of headline earnings per share. Finally, higher revenue growth was found to be positively associated with human capital efficiency in those industries which are not consumer-driven. In the consumer-driven industries, human capital efficiency contributes to bottom line profitability even though it is not a driver for revenue growth. Overall, the results of this study confirm that human capital efficiency enhances a company's financial performance, whether it be through a greater capacity for production and service delivery, tighter cost controls or better use of company resources. Management in all South African industries are encouraged to develop the value-creating abilities of their employees through employer-driven personnel enrichment and training programs and by incentivising workers to pursue further education.

Key words: human capital efficiency, human capital, value-added human capital, VAHU, value-added, competitive advantage, South Africa



1 Introduction

In an industrialised economic environment, such as that in South Africa, the effective use of physical resources is considered to carry more weight than that of human and other intellectual resources in the production of goods and services (Firer & Williams, 2003:357). Consequently, companies may take less care in the development and management of their human capital assets than they do in managing the efficiency and productivity of their tangible assets. However, human capital is the essence of innovation and is therefore crucial to the development of commercial products and the improvement of business processes (Stewart, 1998:76; Sullivan, 2000:9). The validity of this assertion may, however, differ from industry to industry.

According to the World Economic Forum, South Africa's Global Competitiveness Index world ranking has fallen from 36th to 53th since 2006 (The Global Competitiveness Report 2007-2008, 2007:10; The Global Competitiveness Report 2013-2014, 2013:15). The corresponding drop in South Africa's ranking in both Higher Education and Training, and Labour Market Efficiency implies a connection between these factors. To be truly competitive in the long run, whether locally or in the global arena, it is clear that South African businesses will be forced to cultivate their knowledge-based intangible assets, starting with their human capital.

Creating opportunities for their employees to complete secondary or tertiary education or to attend in-house training courses is one way in which businesses in emerging economies can achieve this commercial imperative, and in so doing, indirectly serve the country's need for socio-economic growth. However, the prevailing corporate culture is one in which human capital development expenditure is regarded as an opportunity cost. The aforementioned trade-off in South Africa between tangible and intellectual assets (Firer & Stainbank, 2003:36) means that firms would rather spend available funds on the acquisition or development of property, plant and machinery for production. If employee education and skills development received more attention from the South African private sector and government, the outcome would be a workforce better equipped to bolster the country's economic growth in this age of global competition. This argument is supported by Judson (2002:229), who analysed data on educational spending, enrolment and educational attainment to confirm a positive relationship between economic growth and human capital accumulation.

Human capital and its development are difficult to quantify. In this study, human capital is measured by the efficiency with which it creates value for a business (hereafter known as "human capital efficiency"). The metric for human capital efficiency that has been used in this study, Value-Added Human Capital (VAHU), is best described as the value-added per unit of employee-related input cost (Pulic, 2000:706). Human capital efficiency should not be confused with production efficiency, which refers to an employee's ability to deliver maximum output of the highest quality, using the least inputs, as fast as possible. Production efficiency is related to physical productivity, while the subject matter of this research - human capital efficiency - is related to value creation.

It is hoped that this study will spark a change in the collective perception of education, training and skills development as grudge expenses, rather than essential investments for corporate performance. Empirical research is needed to reinforce the notion that human capital efficiency is important to the success of South African commerce, and consequently the local economy. The primary objective of this research is therefore to investigate the relationship between human capital efficiency and the financial and market performance of South African companies across all industries.

The remainder of the article is organised as follows: the second section summarises prior local and international research relevant to the topic. The underlying conceptual framework is developed and the research methodology presented in the third section. The empirical results are presented and discussed in the penultimate sections, while the final section comprises conclusions reached and suggestions for further research.


2 Literature review

Ioannidis (2005:0696) argued that the strength of a research finding is based on the statistical power of the study, the expected probability of that outcome, the extent of replication, and the consistency of the conclusions reached across similar research. Most of the existing empirical studies about the impact of human capital on corporate performance were performed using Pulic's (2000:706) VAHU as the proxy for human capital. In addition, most studies examined emerging markets that were similar to the South African market. Based on Ioannidis' (2005:0696) criteria, the body of prior research on human capital and firm performance is limited in volume and scope and offers inconsistent, mixed results.

This study intends to further the pioneering exploratory research by Firer and Williams (2003:348), who examined the relationship between intellectual capital and corporate performance in South Africa. Due to the exploratory nature of their research, their sample was restricted to single-period data (2001) for 75 companies in only those industry sectors considered to have inherently high intellectual capital intensity - banking, electronic, information technology and services. Firer and Williams (2003:357) concluded that human capital efficiency is negatively associated with corporate productivity (as measured by asset turnover). This result supported Firer and Stainbank's (2003:36) finding of a trade-off between intellectual capital and tangible assets in South Africa. In order to enhance their productivity, firms were inclined to incur costs in improving the efficiency of their physical assets rather than that of their human capital resources. Although Firer and Williams (2003:357) found that market values declined when companies focused on better use of human capital instead of physical assets, no relationship could be established between VAHU and profitability.

Using the Ohlson (1995) value relevance model, Swartz, Swartz and Firer (2006:78) empirically confirmed that human capital efficiency (measured by VAHU) has a significant and robust positive effect on share prices on the Johannesburg Stock Exchange (JSE). Although the Ohlson (1995) model was deemed unsuitable for this study due to the extent of risk estimations required, their use of share prices three months after each company's financial year-end was adopted. JSE-listed companies are granted three months after year-end to disseminate either their unaudited provisional financial statements or the audited financial statements (JSE Limited Listing Requirements - Service Issue 13, 2010:3-7). This timing difference between the financial and share data is needed to allow the impact of investor and market reactions to the financial statements to reflect in the share prices.

Firer and Williams (2003) and Swartz et al. (2006) examined only the JSE Main Board. The JSE Alternative Exchange (ALT-X) raises development funding for high growth, small market capitalisation companies to encourage entrepreneurship and black economic empowerment. Research encompassing both the Main Board and ALT-X may be considered a better reflection of the true South African market.

The studies by Firer and Williams (2003) and Swartz et al. (2006) deliver contradictory results, leaving no clear consensus on the impact in South Africa of human capital efficiency on the various measures of firm performance. Unfortunately, the research results of international studies do not provide much clarification.

Chen, Cheng and Hwang (2005:159) found a weak positive link between human capital efficiency and the financial and market performance of companies listed on the Taiwan Stock Exchange from 1992 to 2002. Taiwanese firms that display higher human capital efficiency perform only slightly better in terms of market valuation and profitability, as measured by market-to-book ratio, return on equity, return on assets, revenue growth and employee productivity. Shiu (2006:363) examined the technology sector in Taiwan and his conclusions contradicted those of Chen et al. (2005:159). Shiu found no relationship between human capital efficiency and return on assets or market-to-book ratio, yet found VAHU to have a positive impact on asset turnover. Shiu may be criticised for restricting all negative company VAHU to zero in order to derive "meaningful" correlation (Shiu, 2006:359). Negative VAHU data should be used as is and should not be transformed - correlation analysis describes the direction and strength of the linear association between two variables, without imposing requirements on the sign or amount of each variable.

Gan and Saleh (2008:113) found that, in Malaysia, the value-creating efficiency of a firm's human capital resource base is a direct determinant of its profitability and productivity (as measured by return on assets and asset turnover respectively). They found that human capital efficiency had no effect on market-to-book ratio, and suggested that share prices in a young, emerging market such as Malaysia may be driven more by fundamental theory than a more mature stock market would be (Gan & Saleh, 2008:127). They warned that the results may not be representative of the entire Malaysian market because their data was restricted to technology-intensive companies listed on the MESDAQ, a sub-division of the Bursa Malaysia Berhad similar to the JSE ALT-X (Gan & Saleh, 2008:127).

An empirical study of four sectors of the Athens Stock Exchange by Maditinos, Chatzoudes, Tsairidis and Theriou (2011:146) confirmed that human capital development is a necessary factor for corporate success as it is a determinant in share pricing. They confirmed a positive relationship between VAHU and return on equity, but could not establish any between human capital and revenue growth or return on assets. Puntillo (2009:112) concluded that human capital efficiency does not influence return on assets or market-to-book ratio in the Italian financial sector. However, the degree of approximation and extrapolation in her calculation of VAHU poses a strong argument for using staff costs as disclosed in audited financial statements.

Appuhami (2007:24) confirmed a strong positive relationship between VAHU and investor capital gains in the Thai financial sector in 2005. Muhammad and Ismail (2009:210) investigated the impact of human capital efficiency on financial and market performance in the Malaysian financial sector, but regarded their regression results as inconclusive due to their small sample size and coverage of a single year (2007). They could not establish any significant relationship between VAHU and company performance (Muhammad & Ismail, 2009:210). Using a different research sample - the top 25 drug and pharmaceutical companies on the Bangladesh Stock Exchange from 1996 to 2006 - Kamath (2008:700) reached similar conclusions. He confirmed that corporate performance is independent of human capital efficiency.

Several shortcomings were identified in the review of prior literature. Although single-period data was used in most of the prior research, analyses covering a longer time period may yield more meaningful results (Firer & Stainbank, 2003:41; Firer & Williams, 2003:358; Maditinos et al., 2011:146; Tseng & Goo, 2005:199). There is a greater risk of "sampling within a sample" if research is limited to heavily intellectual capital-based sectors only (Firer & Williams, 2003:358; Maditinos et al., 2011:146). By addressing these limitations through cross-sectional, time-series analysis incorporating all industries of the JSE Main Board and ALT-X, it is hoped that this study will add value to the existing body of human capital research in South Africa.


3 Methodology

3.1 Developing the regression models

The research population of this study consisted of all 390 companies listed on the Main Board and ALT-X of the JSE for the financial years falling in the period 31 December 2001 to 30 June 2011, resulting in 1765 company years' of empirical data. Time-series cross-sectional multivariate regressions were used to analyse the impact of human capital on various financial and market performance measures in different South African industries over the period under review. H1-a to H1-e were each performed for six industries - Financials, Basic Materials, Consumer Services, Consumer Goods, Industrials and Technology - resulting in a total of thirty regressions.

ROA t = α +β1(VAHUt) + β2(LMCt) + β3(DRt) + β4(ΙΝD) + ε (H1-a)

GRt = α +β1(νΛΗϋ') + β2(LMCt) + β3(DRt) + β4(ΙΝD) + ε (H1-b)

HEPSt = α +β1(VAHUt) + β2(LMCt) + β3(DRt) + β4(ΙΝD) + ε (H1-c)

M/Bt = α +β1(VAHUt) + β2(LMCt) + β3(DRt) + β4(