Impact of Labor Costs and Investment in Human Capital on Financial Performance: Evidence from Listed Companies in Sri Lanka

The wealth of a company depends on physical assets and intangible assets. The objective of this study is to identify the impact of labor costs and investment in human capital on the financial performance of listed companies in Sri Lanka.   The study is based on secondary data and collected from published annual reports of the selected listed companies in Sri Lanka over the period of 2014 and 2018. The sample consists of fifty-nine (59) companies selected using stratified sampling covering both high and low market capitalization companies in each sector for a period of five (05) years. Labor cost, Investment in human Capital, Return on Assets (ROA) and Earning per share are the variables included in the study. Findings proved that there is a significant positive impact of average Labor Cost on ROA and there is a weak positive correlation between earning per share and average labour cost. Companies with high market capitalization show a moderate positive correlation and companies with low market capitalization are not statistically significant. This study concluded that labour cost and investment in human capital have a positive impact on the financial performance of Sri Lankan listed companies and this relationship is varied based on market capitalization. So, the efforts taken by companies to improve human capital is encouraging and those may directly influence the value creation process of an organization.