Selection versus Talent Effects on Firm Value

36 Pages Posted: 5 Jul 2017 Last revised: 31 Dec 2018

See all articles by Briana Chang

Briana Chang

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: December 26, 2018

Abstract

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

Chang, Briana and Hong, Harrison G., Selection versus Talent Effects on Firm Value (December 26, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2996046 or http://dx.doi.org/10.2139/ssrn.2996046

Briana Chang

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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