FIN 455: Financial Markets and Human Capital

The organization of markets have changed significantly in recent decades. Transaction costs in capital markets have declined, and now provide firms with much better access to private equity, venture capital, and tailorized financial products. Product markets have internationalized and resulted in more complex and widely distributed supply chains. And labor markets have been affected by the trend towards the gig economy and firms’ increased reliance on innovation and intangible assets. The last aspect is key, because we need to ask how firms can develop a competitive advantage if their key assets are employees whose human capital they cannot control. All these developments have a significant impact on how firms are managed, owned, financed, and organized.
This course surveys and discusses recent findings on the interface between financial markets and firms’ employees and their human capital. Much of the textbook discussions in various subfields of business and economics is still based on traditional paradigms, which view firms as collection of physical assets that generate cash flows, and which see financial markets as mainly occupied with valuing and distributing these cash flows. Yet, recent research has moved on from this paradigm and recognizes that this traditional conception is in serious need of overhaul, but much of this change in thinking and many of these new findings have not found their way into business education. This course is intended to fill this gap.

Learning outcomes
After successfully completing this course, students should be able to do the following:

  • Assess business situations that affect the labor force and understand what is special about human capital.
  • Analyze the relationship between firms' labor force (e.g., commitment to employment insurance, difficulties in attracting and retaining employees, job satisfaction) and how financial markets relate to these decisions (valuation, choice of ownership, capital structure).
  • Understand how the markets for key employees (top and middle managers, CEOs, directors, innovators) are organized, and why they sometimes feature sky-rocketing levels and complex structures of compensation.
  • Evaluate how financial transactions like buyouts, mergers and acquisitions, and recapitalizations affect employees and the composition and compensation of firms' labor force.
  • Assess the composition of the workforce, and when diversity of skills and opinions is useful and when it is harmful for decision-making and firm value.
  • Develop a toolbox of theoretical concepts relevant for analyzing human capital issues (and beyond).
  • Gain sound knowledge of empirical facts that are not yet available in a comprehensive written textbook or survey format.
  • Ground ethical discussions of firms' human resource policies in a sound understanding of theory and empirical facts.

Necessary prerequisites
semester 4 or higher

Recommended prerequisites
The course requires cross-disciplinary thinking and understanding of key concepts in accounting, finance, economics, and management at the level of the respective courses in the Bachelor curriculum. The course will introduce key theoretical concepts in economics (e.g., signalling, hold-up problems, principal-agent relations, etc.). No prior knowledge of these concepts is assumed, and all requisite tools from game theory and microeconomics will be introduced at a relatively informal level. However, tolerance for handling abstract concepts is required.

Forms of teaching and learningContact hoursIndependent study time
Lecture2 SWS4 SWS
ECTS credits3
Graded yes
Form of assessmentGroup assignment – case write-up (25%)
Final exam – online take-home (75%)
Restricted admissionno
Further informationRegistration via Student Portal
Performing lecturer
Prof. Ernst Maug, Ph.D.
Prof. Ernst Maug Ph.D.
Frequency of offeringSpring semester
Duration of module 1 semester
Range of applicationB.Sc. Bus. Adm.
Preliminary course work
Program-specific Competency GoalsCG 1
LiteratureMuch of the material presented in this class is new and has either been published recently, or has not even reached the publication stage at this point. In addition, the material cuts across disciplines. As a result, there is no textbook or other monograph treatment. The following textbook provides an excellent treatment of the established theoretical concepts, but it has been written before several of the developments that form the core material of this class:
Milgrom, Paul R., and John Roberts, Economics, Organizations and Management (Prentice Hall, New Jersey), 1992.
Further theoretical developments in the academic literature are mostly too technical and these concepts will be communicated extensively in the lectures and, if necessary, through teaching notes.
The classes will provide guidance to empirical studies and how to read them, and course participants will be asked to read selected (mostly non-technical) passages from empirical studies. Key statistical concepts will be introduced in class, and understanding and interpreting such empirical studies is one of the learning goals of this course.
Course outline
  • Human capital in the Theory of the Firm
  • Part I: Markets and the organization of human capital
    • Internal labor markets
    • Internal frictions
    • Financial markets: The value of human capital
  • Part II: Markets for talent and key employees
    • The level of CEO compensation
    • Incentives and the structure of executive compensation contracts
    • CEO Incentives for the long run
    • Directors
    • Middle management
    • Innovators
  • Part III: Restructuring
    • Buyouts and bankruptcies
    • Mergers and acquisitions
    • Health and ethical issues