Having It Counted: Institutional Investor Construction of Human Capital Disclosure at High-Tech Firms

• In Event: 21067 - Organizational Responses to Regulatory Changes

Abstract

Our study examines how external stakeholders can shape firms’ responses to regulatory ambiguity using the case of the Securities and Exchange Commission (SEC)’s human capital disclosure rule of 2020. The new rule’s vague guidance gave managers significant discretion in deciding what information to disclose—the situation ripe for managerial construction of regulatory compliance. Yet, we suggest that the active involvement of external stakeholders can limit such managerial discretion and lead to improved disclosures across the board. We focus on the role of the Human Capital Management Coalition (HCMC), a group of influential, long-term-oriented institutional investors. Drawing on social movement theory, we theorize how external stakeholders can define acceptable compliance standards and promote their widespread adoption. We apply natural language processing (NLP) techniques to the text data of approximately 500 high-tech firms’ human capital disclosures from 2015 to 2022. Using the data, we construct a novel measure of how closely their disclosures align with the HCMC reporting framework. Our analysis shows that even though the SEC’s rule did not include the human capital metrics the HCMC promoted, firms voluntarily adopted them after the rule change. Moreover, ownership by other long-term-oriented institutional investors, such as the Big Three fund managers, facilitated their adoption. In this way, our study provides a compelling case for the external stakeholder construction of compliance.

Authors

• Suyeon Kang, University of Illinois at Urbana-Champaign

• Jiwook Jung, University of Illinois at Urbana-Champaign