Managerial Labor Market Frictions and Corporate Investment

54 Pages Posted: 20 Jun 2014

See all articles by Ashwini K. Agrawal

Ashwini K. Agrawal

London School of Economics & Political Science (LSE)

Alexander Ljungqvist

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Date Written: June 19, 2014

Abstract

We argue that corporate investment decisions depend not only on project characteristics such as expected NPV, but also on how well a firm can assess its managers’ human capital. If so, projects pitched by managers about whom the firm has more complete information should be more likely to be funded, all else equal. Using a novel matched employer-employee dataset of firms in the U.S. venture capital (VC) industry and exploiting employees’ moves across VC firms for identification, we show that external hires experience a dip in investment activity when they join a new VC firm. Over time, the gap between external hires and seasoned insiders closes, consistent with the firm gathering information about managerial ability. Exogenous shocks to a firm’s ability to learn result in a slower rate of convergence between external hires and insiders. The data are best explained by the interpretation that informational frictions in the managerial labor market have a significant impact on investment policy.

Keywords: Corporate Investment, Human Capital, Personnel Economics

JEL Classification: G30, G31, J24, M51, M54

Suggested Citation

Agrawal, Ashwini K. and Ljungqvist, Alexander, Managerial Labor Market Frictions and Corporate Investment (June 19, 2014). Available at SSRN: https://ssrn.com/abstract=2456758 or http://dx.doi.org/10.2139/ssrn.2456758

Ashwini K. Agrawal

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Alexander Ljungqvist (Contact Author)

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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