Skill is bad for your wealth! Or rather, a recent paper by Anastassia Fedyk and James Hodson provides evidence that firms who invest more in technically skilled labour tend to underperform, both in terms of stock-price and operationally. Obviously, the devil is in the detail, of which there is a lot in this excellent paper. Mr Market tends to get giddy when new technologies arrive and the authors provides evidence that over-valuations of technical skills happen when those skills are emerging and in demand (e.g., web-development in late nineties and data analysis (science) more recently). This helps to explain poor stock price performance but what about operating performance? By using high cash levels as a proxy for empire-building, the paper shows that firms more prone to empire building carry a lower valuation premium when investing in technical skill but have a higher negative return premium, implying this is less to do with investors’ misallocation of capital than with managements’.

An interesting twist on the analysis provided here would be to step away from the Fama-Macbeth framework and in particular investigate the relationship between skilled labour and firm size. One could hypothesise that productivity of such labour diminishes as a firm grows beyond a certain size. Such diseconomies of scale are probably harder to unravel for human capital than they are for physical. Anecdotally, the interaction of culture and skill is also be an important factor in terms of research output and company performance. As a factor in its own right, there is evidence to suggest that culture is a predictor of cross-sectional stock returns (e.g. Edmans (2011)) and an ML-based approach may well be better suited to tease out the non-linear relationships between technical skill, firm size and culture.