How Does Human Capital’s Impact to Cost of Financial Distress?

Purpose: The important of human capital relation to firm financial distress still get limited attention, but there is some evidence that firm reduce the cost of human capital when its get a declining financial performance due to bankcruptcy. This study aims exploring the cost of financial distress determinant by human capital. Methodology: We use the data of manufacturing industry in Indonesia Stock Exchange (IDX) during 2011 – 2017. We use monetary approach for measuring human capital by income-base indicator i.e wage/salary and cost of financial distress measured by the difference of firm sales and industry sales. Furthermore, this study illustrates a tendency of cost of financial distress which controlled by firm size, firm age, and leverage. We analyze using static panel data and also doing robustness check as analysis completement. Results: The results find that human capital has positive significant impact to cost of financial distress and excess salary is a breakthrough of indicator for measuring human capital. Furthermore, the usage of firm size, firm age, and leverage as control variable, we find that larger and older firms able to more control their human capital against the cost of financial distress, thus, they can get the benefit of human capital increasing as their competitive strategy. Applications/Originality/Value: Based income indicator, exceess salary as measurement of human capital that built in this study supports the previous empirical studies in describing human capital’s impact to cost of financial distress. The results has practical implication that a firm should concern to welfare of employee as long as it does not exceed the firm’s revenue for avoiding firm’s bankruptcy. Furthermore, the goverment may should thinks about optimal standard of employee salary or wages in distressed firm according our finding of human capital role in firm costs. INTRODUCTION A different strategy help a firm get competitive advantage that make it having the balancing position in its industry. The main elements considered are risk and output that must be managed by the firm for its work’s improvisation. (Chirani & Effatdoost, 2013). Economic uncertainty make investment activities not going well therefore it often affect firm’s financial performance. The declining potential of firm’s financial performance make a bigger chance of bankcruptcy when firm fails minimalizing it. A decreased firm’s financial performance leads to its unability of management anticipating of this change and this indication is commonly refered as financial distress that occurs before bankruptcy or liquidation (Platt & Platt, 2006). The phenomenon of financial distress in Indonesian industry is detected from the number of delisted firms from various sectors during 2009-2018. This has been a signal (bad news) that financial distress threat become a firm risk in all industries. Financial distress be able occure in various industries and as early signal of bankruptcy that might be experienced by firms. The distressed firm has consequences such decreasing of firm’s value that leads to lower prosperity of shareholder and then has been reflected in stock price falling. The indication of financial distress be detected through three conditions are negative earning before interest and tax depreciation 1 Corresponding author: e_witd@yahoo.com International Summit on Science Technology and Humanity (ISETH2019) Advancing Scientific Thought for Future Sustainable Development p-ISSN: 2477-3328 e-ISSN: 2615-1588 International Summit on Science Technology and Humanity 402 ISETH (EBITDA), negative earning before interest tax (EBIT), and negative net income Financial distress is a condition which insufficient operational cash flow and then leads to liquidity problem. When firm unable to fulfil its financial obligation, so firm becomes getting financial distress condition and bearing an expense, namely cost of financial distress (Pindado & Rodrigues, 2005). Cost of Financial Distress (CFD) suffered by firm as a result of financial position weakening or business disruption (Bulot et al, 2014). The importance of CFD‘s determinant become an important concern for researchers because there are some facts that unexpected economic crisis impacts to economy growth of many countries and make several lossed industries then get their bankruptcy. The survived firms seem focus on their human resources for having better corporate governance. Mc.Gruick et al (2015) state that competitive advantage strategy depends on firm ability of innovating, evaluating, and exploitating its internal and external resources. Furthermore, human resource ie. human capital is important for corporate management and should be developed through enrichment of knowledge, expertise, and experience as key strategic of innovation. Human capital is a centre of competitive advantage, productivity, increased capacity, and national economic growth (Kwon & Dae-Bong, 2009). This study considers suggestion of Montare (2013) that financial management should focus on continuance of human capital cost research and its relation to financial distress. According Graham et al (2013), salary losses due to reduced work capacity of firm improvisation in its industry. The higher of salary cost paid using debts for competitive decisions may generate CFD. Previous researchs show that human capital cost is quite large and using debt exceed the limit significantly, then cost of bankruptcy possible arise from labor linked balance of tax benefit of debt (Berk, et all., 2010). This supported by Brown & Medoff (1989) that find a positive impact of firm size to salary. The relation of human capital and CFD still has been interesting topic of finance, because there is sparse in some results of human capital’s impact to firm performance, such return on sales (Roca-Puig et al., 2011), capital structure and payment of workers (Chemmanur et al., 2007; Gill, 2011; Tahir and Fraz, 2015). Furthermore, some results show the inconsistency of human capital’s impact to cost of financial distress are unsignificant (Korteweg, 2007; Berk et al., 2010; Gill, 2011), and significant (Graham et al, 2014). The gap among these findings show that there is an optimum strategy implementation of firm’s human capital for increasing firm’s value and not the contrary, lead to the higher cost that may bring financial distress to the firm. Generally, this study aims to analyze the effect of human capital on CFD. Previous studies implicitly and explicitly describe negative relationship and disfunction of human capital on CFD (Korteweg, 2007). We argue excess salary as breakthrough of human capital proxy could reflects firm decision of human resource upgrading and describe its link to financial distress. However, the accuracy of human capital measurement is main indicator of firm for decreasing Cost of Financial Distress (CFD) and then impact to its strategical decisions. Specifically, we use firm size, firm age, and leverage as control variables and expect it could clarifying human capital as determiant CFD.