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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)
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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

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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).

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