Firm-Specific Human Capital, Organizational Incentives, and Agency Costs: Evidence from Retail Banking

Strategic Management Journal, Forthcoming

HEC Paris Research Paper No. SPE-2013-999

41 Pages Posted: 4 Sep 2013

See all articles by Douglas H. Frank

Douglas H. Frank

The Catholic University of America

Tomasz Obloj

HEC Paris - Strategy & Business Policy

Date Written: May 16, 2013

Abstract

This paper explores conflicting implications of firm-specific human capital (FSHC) for firm performance. Existing theory predicts a productivity effect that can be enhanced with strong incentives. We propose an offsetting agency effect: FSHC may facilitate more sophisticated “gaming” of incentives, to the detriment of firm performance. Using a unique dataset from a multiunit retail bank, we document both effects and estimate their net impact. Managers with superior FSHC are more productive in selling loans but are also more likely to manipulate loan terms to increase incentive payouts. We find that resulting profits are two percentage points lower for high-FSHC managers. Finally, profit losses increase more rapidly for high-FSHC managers, indicating adverse learning. Our results suggest that FSHC can create agency costs that outweigh its productive benefits.

Suggested Citation

Frank, Douglas H. and Obloj, Tomasz, Firm-Specific Human Capital, Organizational Incentives, and Agency Costs: Evidence from Retail Banking (May 16, 2013). Strategic Management Journal, Forthcoming; HEC Paris Research Paper No. SPE-2013-999. Available at SSRN: https://ssrn.com/abstract=2319265

Douglas H. Frank

The Catholic University of America

Washington, DC 20064
United States

Tomasz Obloj (Contact Author)

HEC Paris - Strategy & Business Policy ( email )

Jouy-en-Josas Cedex, 78351
France

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