Human Capital, Management Quality, and Firm Performance

65 Pages Posted: 20 Mar 2014 Last revised: 1 Dec 2018

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Lei Kong

University of Alabama - Department of Economics, Finance and Legal Studies

Karthik Krishnan

Northeastern University

Qianqian Yu

Lehigh University

Date Written: May 6, 2014

Abstract

We analyze the relationship between the human capital of firms' top management teams (“management quality”) and their long-run performance using panel data from the BoardEx database on firms’ top management characteristics and a management quality index constructed using common factor analysis on individual proxies for various aspects of top management quality. We control for the potentially endogenous matching between firm and management quality using a plausibly exogenous shock to the supply of new managers as an instrument. Using this instrument, we find a causal relationship between firms' management quality and their future operating performance, market valuations, and stock returns. To further identify the relationship between management quality and firm performance, we make use of the differences in the frictions to the movement of top managers across firms located in various US states due to their differential adoption of the Inevitable Disclosure Doctrine (IDD). We hypothesize that the adoption of the IDD will reduce managerial incentives to exert effort on behalf of their firms. Consistent with this hypothesis, we find that the sensitivity of firm performance to management quality is lower in states that have adopted the IDD. Finally, we analyze the channels through which management quality may affect firm performance and find a positive relationship between management quality and firm investment (both levels and changes) as well as between management quality and new product introductions in the immediate future.

Keywords: Human Capital; Management Quality; Operating Performance; Market Valuation; Stock Return

JEL Classification: G32; L25

Suggested Citation

Chemmanur, Thomas J. and Kong, Lei and Krishnan, Karthik and Yu, Qianqian, Human Capital, Management Quality, and Firm Performance (May 6, 2014). Northeastern U. D’Amore-McKim School of Business Research Paper No. 2014-01. Available at SSRN: https://ssrn.com/abstract=2411231 or http://dx.doi.org/10.2139/ssrn.2411231

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Lei Kong

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

Karthik Krishnan

Northeastern University ( email )

360 Huntington Avenue
414C Hayden Hall
Boston, MA 02115
United States
617-373-4707 (Phone)

HOME PAGE: http://www.northeastern.edu/kkrishnan

Qianqian Yu

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

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