Managerial Labor Market Frictions and Corporate Investment
54 Pages Posted: 20 Jun 2014
Date Written: June 19, 2014
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
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