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Firm‐specific human capital, organizational incentives, and agency costs: Evidence from retail banking
Author(s) -
Frank Douglas H.,
Obloj Tomasz
Publication year - 2014
Publication title -
strategic management journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 11.035
H-Index - 286
eISSN - 1097-0266
pISSN - 0143-2095
DOI - 10.1002/smj.2148
Subject(s) - incentive , agency cost , business , loan , agency (philosophy) , profit (economics) , principal–agent problem , industrial organization , productivity , finance , human capital , microeconomics , economics , marketing , monetary economics , market economy , corporate governance , philosophy , epistemology , shareholder , macroeconomics
This paper explores conflicting implications of firm‐specific human capital ( FSHC ) for firm performance. Existing theory predicts a productivity effect that can be enhanced with strong incentives. We propose an offsetting agency effect : FSHC may facilitate more‐sophisticated ‘gaming’ of incentives, to the detriment of firm performance. Using a unique dataset from a multiunit retail bank, we document both effects and estimate their net impact. Managers with superior FSHC are more productive in selling loans but are also more likely to manipulate loan terms to increase incentive payouts. We find that resulting profits are two percentage points lower for high‐ FSHC managers. Finally, profit losses increase more rapidly for high‐ FSHC managers, indicating adverse learning. Our results suggest that FSHC can create agency costs that outweigh its productive benefits . Copyright © 2013 John Wiley & Sons, Ltd.