Skilled Labour, Employee Ownership, and Firm Risk

Employing highly qualified and skilled workers is crucial for firms in the knowledge economy, as they compete in an increasingly complex and turbulent business environment. Whilst substantial research has focused on the potential benefits of investment in skilled labour, little attention has been given to its downside. This thesis examines one important aspect, namely increases in the firm’s equity risk. The quality of human capital in individual firms is generally unobservable. To bypass this, a labour skill index is constructed using industry-level data, representing the degree to which firms in a given industry rely on skilled labour. The index is calculated annually from 1990 to 2014 across a wide range of industries, and is the main test variable throughout the empirical chapters. The major findings of this thesis are as follows. First, firms located in more highly skilled industries are perceived by investors as having more volatile fundamentals, reflected in greater idiosyncratic return volatility. The relationship is moderated by the presence of broad-based employee ownership, highlighting the latter’s risk management implications. Second, with respect to the level of broad-based employee ownership, it displays an inverted U-shaped relationship with the labour skill index. The positive relationship between the two is reversed only for firms at the top end of the skill spectrum. Third, firms that rely more heavily on skilled labour incur a higher implied cost of equity. This is attributed to increased operating leverage which amplifies firms’ exposure to systematic risk. Summarising, this thesis provides evidence that reliance on skilled labour exacerbates both idiosyncratic and systematic components of the firm’s equity risk. In addition, this thesis corroborates broad-based employee ownership as a form of employee governance, and shows that its presence mitigates firm-specific return volatility associated with investment in skilled labour.