Financing Human Capital: A Survey and Synthesis

This article surveys a large body of literature that investigates the relationship between corporate finance developments and human capital. Human capital has become increasingly important as a factor of production for firms—rivaling physical capital—and as an asset constituting a substantial proportion of wealth in modern economies. Its growing importance is linked to several trends in corporate finance and governance: firms rely less on debt and public markets, hold more cash, and conserve cash through their payout policies. The literature identifies multiple mechanisms suggesting a causal link between human capital and these corporate finance trends. The key insight is that firms manage two interdependent types of constraints: financial constraints and human resource constraints. Contractual solutions, ownership structures, and power-sharing arrangements between investors and employees emerge as second-best solutions to balance these constraints. Taking a dynamic perspective, the article argues that resource constraints and optimal governance arrangements evolve over the firm’s life cycle. This discussion includes start-ups, the increasingly delayed decision to go public, private-equity buyouts, and mergers and acquisitions (M&As), showing how firms change ownership and governance structures to prioritize different constraints over time. Finally, the article examines how human capital is reflected in stock prices. While financial markets partially incorporate the value of human capital investments and employee relations, this partial recognition may lead to underinvestment. Moreover, human capital constraints contribute to increased risk, which is priced into financial markets. The conclusion reflects on the theory of the firm and offers a tentative outlook on future research directions.