Hostname: page-component-586b7cd67f-r5fsc Total loading time: 0 Render date: 2024-12-01T07:21:10.831Z Has data issue: false hasContentIssue false
  • English
  • Français

The Fragility of Organization Capital

Published online by Cambridge University Press:  01 March 2021

Oliver Boguth ,
David Newton  and
Mikhail Simutin
Oliver Boguth
Affiliation:
Arizona State University, W. P. Carey School of Business [email protected]
David Newton
Affiliation:
Concordia University, Molson School of Business [email protected]
Mikhail Simutin*
Affiliation:
University of Toronto, Rotman School of Management
*
[email protected] (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

Firms with high levels of organization capital (OK), a firm-specific production factor provided by key employees, are known to be risky and earn high stock returns. We argue that fragility of OK (i.e., its sensitivity to potential disruptions) is an independently important dimension of this risk. We proxy for fragility by the size of the top management team and show that firms with small teams outperform firms with big teams by 5% annually. The return spread increases in the level of OK and correlates with the outside options of top executives. Further supporting our interpretation, shocks to team composition from unexpected deaths of chief executive officers cause larger value losses in smaller teams.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 3 , May 2022 , pp. 857 - 887
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank Maria Chaderina, Mihai Ion, Ryan Israelsen (the referee), Paul Malatesta (the editor), Michael Weber, and seminar participants at the University of Vienna, the 2016 Arizona Junior Finance conference, Acadian Asset Management, the 2016 University of Alberta Frontiers in Finance conference, the 2016 Conference on Financial Economics and Accounting, and the 2017 European Finance Association conference for helpful comments and suggestions. We would also like to thank Ryan Israelsen, Dirk Jenter, and Scott Yonker for sharing their data. Simutin gratefully acknowledges support from the Social Sciences and Humanities Research Council (Grant No. 435–2019-1252).

References

Adams, R. B.; Almeida, H.; and Ferreira, D.. “Powerful CEOs and Their Impact on Corporate Performance.” Review of Financial Studies, 18 (2005), 1403–1432.CrossRefGoogle Scholar
Asparouhova, E.; Bessembinder, H.; and Kalcheva, I.. “Liquidity Biases in Asset Pricing Tests.” Journal of Financial Economics, 96 (2010), 215–237.CrossRefGoogle Scholar
Asparouhova, E.; Bessembinder, H.; and Kalcheva, I.. “Noisy Prices and Inference Regarding Returns.” Journal of Finance, 68 (2013), 665–714.CrossRefGoogle Scholar
Bantel, K. A., and Jackson, S. E.. “Top Management and Innovations in Banking – Does the Composition of the Top Team Make a Difference?” Strategic Management Journal, 10 (1989), 107–124.CrossRefGoogle Scholar
Bebchuk, L.; Cohen, A.; and Ferrell, A.. “What Matters in Corporate Governance?” Review of Financial Studies, 22 (2009), 783–827.CrossRefGoogle Scholar
Belo, F.; Lin, X.; and Bazdresch, S.. “Labor Hiring, Investment, and Stock Return Predictability in the Cross Section.” Journal of Political Economy, 122 (2014), 129–177.CrossRefGoogle Scholar
Belo, F.; Lin, X.; and Vitorino, M. A.. “Brand Capital and Firm Value.” Review of Economic Dynamics, 17 (2014), 150–169.CrossRefGoogle Scholar
Boone, A. L.; Field, L. C.; Karpoff, J. M.; and Raheja, C. G.. “The Determinants of Corporate Board Size and Composition: An Empirical Analysis.” Journal of Financial Economics, 85 (2007), 66–101.CrossRefGoogle Scholar
Bourdieu, P. “The Forms of Capital.” In Handbook of Theory and Research for the Sociology of Education, Richardson, J. G., ed. New York: Greenwood (1986), 241–258.Google Scholar
Carhart, M. M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Carpenter, M. A.; Sanders, W. G.; and Gregersen, H. B.. “Bundling Human Capital with Organizational Context: The Impact of International Assignment Experience on Multinational Firm Performance and CEO Pay.” Academy of Management Journal, 44 (2001), 493–511.Google Scholar
Chan, L. K. C.; Lakonishok, J.; and Sougiannis, T.. “The Stock Market Valuation of Research and Development Expenditures.” Journal of Finance, 56 (2001), 2431–2456.CrossRefGoogle Scholar
Chemmanur, T. J.; Kong, L.; Krishnan, K.; and Yu, Q.. “Human Capital, Top Management Quality, and Firm Performance.” Working Paper, Boston College (2019).Google Scholar
Cheng, S. “Board Size and the Variability of Corporate Performance.” Journal of Financial Economics, 87 (2008), 157–176.CrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Boards: Does One Size Fit All?” Journal of Financial Economics, 87 (2008), 329–356.CrossRefGoogle Scholar
Cooper, M. J.; Gulen, H.; and Schill, M. S.. “Asset Growth and the Cross-Section of Stock Returns.” Journal of Finance, 63 (2008), 1609–1651.CrossRefGoogle Scholar
Custódio, C.; Ferreira, M. A.; and Matos, P.. “Generalists Versus Specialists: Lifetime Work Experience and Chief Executive Officer Pay.” Journal of Financial Economics, 108 (2013), 471–492.CrossRefGoogle Scholar
Cziraki, P., and Jenter, D.. “The Market for CEOs.” Working Paper, University of Toronto (2020).CrossRefGoogle Scholar
Davis, J. L.; Fama, E. F.; and French, K. R.. “Characteristics, Covariances, and Average Returns: 1929 to 1997.” Journal of Finance, 55 (2000), 389–406.CrossRefGoogle Scholar
Denis, D. J., and Denis, D. K.. “Performance Changes Following Top Management Dismissals.” Journal of Finance, 50 (1995), 1029–1057.CrossRefGoogle Scholar
Dimaggio, P. J., and Powell, W. W.. “The Iron Cage Revisited – Institutional Isomorphism and Collective Rationality in Organizational Fields.” American Sociological Review, 48 (1983), 147–160.CrossRefGoogle Scholar
Donangelo, A. “Labor Mobility: Implications for Asset Pricing.” Journal of Finance, 69 (2014), 1321–1346.CrossRefGoogle Scholar
Edmans, A. “Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices.” Journal of Financial Economics, 101 (2011), 621–640.CrossRefGoogle Scholar
Eisfeldt, A. L., and Papanikolaou, D.. “Organization Capital and the Cross-Section of Expected Returns.” Journal of Finance, 68 (2013), 1365–1406.CrossRefGoogle Scholar
Eisfeldt, A. L., and Rampini, A. A.. “Capital Reallocation and Liquidity.” Journal of Monetary Economics, 53 (2006), 369–399.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 47 (1992), 427–465.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Dissecting Anomalies.” Journal of Finance, 63 (2008), 1653–1678.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “A Five-Factor Asset Pricing Model.” Journal of Financial Economics, 116 (2015), 1–22.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.CrossRefGoogle Scholar
Fee, C. E., and Hadlock, C. J.. “Management Turnover across the Corporate Hierarchy.” Journal of Accounting and Economics, 37 (2004), 3–38.CrossRefGoogle Scholar
Finkelstein, S.; Hambrick, D. C.; and Cannella, A. A.. Strategic Leadership: Theory and Research on Executives, Top Management Teams, and Boards. Oxford: Oxford University Press (2009).Google Scholar
Gillan, S. L.; Hartzell, J. C.; Koch, A.; and Starks, L. T.. “Getting the Incentives Right: Backfilling and Biases in Executive Compensation Data.” Review of Financial Studies, 31 (2018), 1460–1498.CrossRefGoogle Scholar
Haddad, V.; Loualiche, E.; and Plosser, M.. “Buyout Activity: The Impact of Aggregate Discount Rates.” Journal of Finance, 72 (2017), 371–414.CrossRefGoogle Scholar
Hall, R. E. “The Stock Market and Capital Accumulation.” American Economic Review, 91 (2001), 1185–1202.CrossRefGoogle Scholar
Hansen, L. P.; Heaton, J. C.; and Li, N.. “Intangible Risk.” In Measuring Capital in the New Economy, Corrado, C., Haltiwanger, J., and Sichel, D., eds. Chicago, IL: University of Chicago Press (2005).Google Scholar
Harvey, C. R.; Liu, Y.; and Zhu, H.. “… and the Cross-Section of Expected Returns.” Review of Financial Studies, 29 (2016), 5–68.CrossRefGoogle Scholar
Hirshleifer, D.; Hsu, P.-H.; and Li, D.. “Innovative Efficiency and Stock Returns.” Journal of Financial Economics, 107 (2013), 632–654.CrossRefGoogle Scholar
Hou, K.; Xue, C.; and Zhang, L.. “Digesting Anomalies: An Investment Approach.” Review of Financial Studies, 28 (2015), 650–705.CrossRefGoogle Scholar
Israelsen, R. D., and Yonker, S. E.. “Key Human Capital.” Journal of Financial and Quantitative Analysis, 51 (2017), 175–214.CrossRefGoogle Scholar
Jenter, D., and Kanaan, F.. “CEO Turnover and Relative Performance Evaluation.” Journal of Finance, 70 (2015), 2155–2183.CrossRefGoogle Scholar
Jenter, D.; Matveyev, E.; and Roth, L.. “Good and Bad CEOs.” Working Paper, London School of Economics (2016).Google Scholar
Johnson, W. B.; Magee, R. P.; Nagarajan, N. J.; and Newman, H. A.. “An Analysis of the Stock-Price Reaction to Sudden Executive Deaths – Implications for the Managerial Labor-Market.” Journal of Accounting and Economics, 7 (1985), 151–174.CrossRefGoogle Scholar
Keck, S. L., and Tushman, M. L.. “Environmental and Organizational Context and Executive Team Structure.” Academy of Management Journal, 36 (1993), 1314–1344.Google Scholar
Lev, B., and Radhakrishnan, S.. “The Valuation of Organization Capital.” In Measuring Capital in the New Economy, Corrado, C., Haltiwanger, J., and Sichel, D., eds. Chicago, IL: University of Chicago Press (2005), 73–110.CrossRefGoogle Scholar
Liebersohn, C. J., and Packard, H. A.. “The Cyclicality of CEO Turnover.” Working Paper, Ohio State University (2019).Google Scholar
Manconi, A.; Rizzo, A. E.; and Spalt, O. G.. “Diversity Investing.” Working Paper, Tilburg University (2017).Google Scholar
Mintzberg, H. “The Structuring of Organizations: A Synthesis of the Research.” University of Illinois at Urbana-Champaign’s Academy for Entrepreneurial Leadership Historical Research Reference in Entrepreneurship (1979).Google Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semidefinite, Heteroskedasticity and Autocorrelation Consistent Covariance-Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Novy-Marx, R. “The Other Side of Value: The Gross Profitability Premium.” Journal of Financial Economics, 108 (2013), 1–28.CrossRefGoogle Scholar
Pantzalis, C., and Park, J. C.. “Equity Market Valuation of Human Capital and Stock Returns.” Journal of Banking and Finance, 33 (2009), 1610–1623.CrossRefGoogle Scholar
Peters, F. S., and Wagner, A. F.. “The Executive Turnover Risk Premium.” Journal of Finance, 69 (2014), 1529–1563.CrossRefGoogle Scholar
Prescott, E. C., and Visscher, M.. “Organization Capital.” Journal of Political Economy, 88 (1980), 446–461.CrossRefGoogle Scholar
Raheja, C. G. “Determinants of Board Size and Composition: A Theory of Corporate Boards.” Journal of Financial and Quantitative Analysis, 40 (2005), 283–306.CrossRefGoogle Scholar
Sah, R. K., and Stiglitz, J. E.. “The Architecture of Economic-Systems – Hierarchies and Polyarchies.” American Economic Review, 76 (1986), 716–727.Google Scholar
Sah, R. K., and Stiglitz, J. E.. “The Quality of Managers in Centralized versus Decentralized Organizations.” Quarterly Journal of Economics, 106 (1991), 289–295.CrossRefGoogle Scholar
Sloan, R. G. “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?” Accounting Review, 71 (1996), 289–315.Google Scholar
Yermack, D. “Higher Market Valuation of Companies with a Small Board of Directors.” Journal of Financial Economics, 40 (1996), 185–211.CrossRefGoogle Scholar
Zhao, X. “Does Information Intensity Matter for Stock Returns? Evidence from SEC Current Report Filings.” Management Science, 63 (2017), 1382–1404.CrossRefGoogle Scholar