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Organization Capital and the Cross-Section of Expected Returns

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  • ANDREA L. EISFELDT
  • DIMITRIS PAPANIKOLAOU

Abstract

This paper studies the unique risk characteristics of organization capital. Using a stock measure of organization capital based on readily available accounting data, we find that firms with more organization capital relative to their industry peers outperform firms with less organization capital by 4.7% per year. A long short portfolio based on the ratio of the stock of organization capital to total assets within industries has a Sharpe ratio of 0.57. We construct a model featuring what we argue are the two most salient features of organization capital, namely that it is firm specific and that it is partially embodied in firms' labor input and thus cannot be wholly owned by shareholders. The model economy illustrates the sensitivity of organization capital to economic restructuring and the resulting risk premia required for high organization capital firms.

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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 68 (2013)
Issue (Month): 4 (08)
Pages: 1365-1406

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Handle: RePEc:bla:jfinan:v:68:y:2013:i:4:p:1365-1406

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References

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  1. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
  2. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  3. Adriano Rampini & Andrea Eisfeldt, 2005. "Financing Shortfalls and the Value of Aggregate Liquidity," 2005 Meeting Papers 889, Society for Economic Dynamics.
  4. Eisfeldt, Andrea L. & Rampini, Adriano A., 2006. "Capital reallocation and liquidity," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 369-399, April.
  5. Gordon M Phillips & Vojislav Maksimovic, 1999. "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and are there Efficiency Gains?," Working Papers 99-12, Center for Economic Studies, U.S. Census Bureau.
  6. Robert E. Hall, 1999. "The Stock Market and Capital Accumulation," NBER Working Papers 7180, National Bureau of Economic Research, Inc.
  7. Prescott, Edward C & Visscher, Michael, 1980. "Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 446-61, June.
  8. Andrew Atkeson & Patrick J. Kehoe, 2005. "Modeling and measuring organization capital," Staff Report 291, Federal Reserve Bank of Minneapolis.
  9. Dimitris Papanikolaou, 2008. "Investment-Specific Technological Change and Asset Prices," 2008 Meeting Papers 637, Society for Economic Dynamics.
  10. Rosen, Sherwin, 1972. "Learning by Experience as Joint Production," The Quarterly Journal of Economics, MIT Press, vol. 86(3), pages 366-82, August.
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Citations

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Cited by:
  1. Frederico Belo & Xiaoji Lin & Maria Ana Vitorino, 2014. "Brand Capital and Firm Value," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 150-169, January.
  2. Leonid Kogan & Mary Tian, 2012. "Firm characteristics and empirical factor models: a data-mining experiment," International Finance Discussion Papers 1070, Board of Governors of the Federal Reserve System (U.S.).
  3. Leena Rudanko & Francois Gourio, 2011. "Customer capital and the business cycle," 2011 Meeting Papers 120, Society for Economic Dynamics.
  4. Urban Jermann, 2013. "A Production-Based Model for the Term Structure," NBER Working Papers 18774, National Bureau of Economic Research, Inc.
  5. Hanno Lustig & Chad Syverson & Stijn Van Nieuwerburgh, 2009. "Technological Change and the Growing Inequality in Managerial Compensation," NBER Working Papers 14661, National Bureau of Economic Research, Inc.
  6. Matthias Kehrig, 2011. "The Cyclicality of Productivity Dispersion," Working Papers 11-15, Center for Economic Studies, U.S. Census Bureau.
  7. Kuhnen, Camelia M. & Oyer, Paul, 2012. "Exploration for human capital: Theory and evidence from the MBA labor market," MPRA Paper 39411, University Library of Munich, Germany.
  8. Francois Gourio & Leena Rudanko, 2011. "Customer Capital," NBER Working Papers 17191, National Bureau of Economic Research, Inc.
  9. Leonid Kogan & Dimitris Papanikolaou, 2012. "Growth Opportunities, Technology Shocks, and Asset Prices," NBER Working Papers 17795, National Bureau of Economic Research, Inc.
  10. Carlin, Bruce Ian & Chowdhry, Bhagwan & Garmaise, Mark J., 2012. "Investment in organization capital," Journal of Financial Intermediation, Elsevier, vol. 21(2), pages 268-286.
  11. Vasia Panousi & Dimitris Papanikolaou, 2011. "Investment, idiosyncratic risk, and ownership," Finance and Economics Discussion Series 2011-54, Board of Governors of the Federal Reserve System (U.S.).
  12. jae sim & Dalida Kadyrzhanova & Antonio Falato, 2013. "Rising Intangible Capital, Shrinking Debt Capacity, and the US Corporate Savings Glut," 2013 Meeting Papers 1151, Society for Economic Dynamics.

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