The Fragility of Organization Capital

Firms with high levels of organization capital, a firm-specific production factor provided by key employees, are known to be risky and earn high stock returns. We argue that fragility of organization capital -- its sensitivity to potential disruptions -- is an independently important determinant of 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 6% annually. Supporting our interpretation, the return spread increases in the level of organization capital, and shocks to team composition from unexpected CEO deaths cause larger value losses in smaller teams.

Keywords: Organization capital, intangibles, fragility, top management team, executives, CEO deaths, stock returns, cross-sectional asset pricing

JEL Classification: G12, J24, M12, M510

Suggested Citation: Suggested Citation

Boguth, Oliver and Newton, David and Simutin, Mikhail, The Fragility of Organization Capital (February 28, 2018). Rotman School of Management Working Paper No. 2667882, 27th Annual Conference on Financial Economics and Accounting Paper, Available at SSRN: https://ssrn.com/abstract=2667882 or http://dx.doi.org/10.2139/ssrn.2667882