LAUSR

This article develops theory about an agency problem affecting the strategic human capital (SHC) of the firm. It proposes three categories of SHC-related choices managers must make that imply a trade-off between near- and long-term performance. Dispersed shareholding, firm coverage by securities analysts, and their practice of publishing quarterly earnings forecasts are argued to entail a bias in management incentives, shifting the balance in this trade-off toward near-term performance. To restore the balance, securities analysts would need to distinguish transitory from recurring effects of SHC-related choices in their valuation models (e.g., treating certain labor cost savings during cyclical downturns as transitory). Restoring the balance would also require them to anticipate long-term effects in their long-term earnings forecasts (e.g., long-term positive effects of retaining employees with valuable skills during cyclical downturns). The article discusses specific transitory cost effects and long-term effects they could potentially take into account. The skills and incentives needed by analysts to account for such effects are argued to vary across firm segments.