Human capital increases through training, be that implicit on-the-job training (as captured by tenure), or explicit classroom-type formal training leading to human capital accumulation. Our focus in this paper is mostly on the latter: we are interested in how a firm’s explicit decision to train depends on aggregate and sectoral output fluctuations.
It is not ex-ante obvious whether investments in human capital are counter cyclical, pro-cyclical, or a-cyclical. Since the opportunity cost to train workers is lower in downturns, a negative productivity shock should be associated with increased training. This channel is highlighted by deJong and Ingram (2001) who find that training activities “are distinctively countercyclical” and by Devereux (2000) who argues that during downturns firms hoard labor by assigning high-skill workers to lower-production activities such as training, thus avoiding layoffs and the fixed costs associated with firing and re-hiring workers. On the worker side, the literature documents that college enrollment is counter-cyclical (e.g. Dellas and Sakellaris (2003)); typically, enrollment in universities increases when the economy is not doing well and good jobs are harder to find.
We ask whether risk or mispricing is the main driving force behind capital markets anomalies, which are empirical relations between average returns and firm characteristics not explained by standard asset pricing models. Over the past three decades, anomalies have become important in asset allocation, capital budgeting, security analysis, hedge fund strategies, and many other applications. Understanding their driving forces is one of the most important questions in capital markets research.
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