Selection versus Talent Effects on Firm Value
36 Pages Posted: 5 Jul 2017 Last revised: 31 Dec 2018
Date Written: December 26, 2018
Measuring the value of labor-market hires for stock prices, be it underwriters when firms go public (IPOs) or chief executive officers (CEOs), is difficult due to selection. Opaque firms with higher costs of capital benefit more from prestigious underwriters, while productive firms benefit more from talented CEOs. Using assignment models, we show that the importance of talent (or agent heterogeneity) relative to selection (or firm heterogeneity) is measured by wage increases across agents of different compensation ranks divided by changes in output across their firms. The median of this ratio is 0.5% for underwriters and 2% for CEOs.
Keywords: CEO, Underwriters, IPO Underpricing, Prestige, Talent, Selection, Sorting
JEL Classification: G1, G2
Suggested Citation: Suggested Citation