Methodological Issues in Cross‐Sectional and Panel Estimates of the Human Resource‐Firm Performance Link

Because companies differ in factors such as management ability that may lead to both high performance work systems and enhanced firm performance, conventional estimates of the effects of human resource (HR) management practices on firm performance may be biased upward. Alternatively, if HR management practices are measured with error, estimates of their effects on firm performance may be biased downward. We find that although longitudinal estimates that avoid the first source of bias are substantially smaller than cross‐sectional estimates, the former are strongly influenced by errors in measuring HR management practices. Based on independent estimates of the measurement error, we calculate a range of estimates that correct for both biases. We estimate that a one standard deviation increase in our measure of high performance work systems raises the market value of the corporation by approximately 15, 000 per employee.