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Firm-Specific Human Capital, Organizational Incentives, and Agency Costs: Evidence from Retail Banking

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  • Frank Jr. , Douglas H.

    ()

  • Obloj , Tomasz

    ()

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    Abstract

    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.

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    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2319265
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    Bibliographic Info

    Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 999.

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    Length: 41 pages
    Date of creation: 16 May 2013
    Date of revision:
    Handle: RePEc:ebg:heccah:0999

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    Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
    Web page: http://www.hec.fr/
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    Related research

    Keywords: FSHC; firm-specific human capital; firm performance; incentives; multiunit retail bank;

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    Cited by:
    1. Teixeira, Aurora A.C. & Tavares-Lehmann, Ana Teresa, 2014. "Human capital intensity in technology-based firms located in Portugal: Does foreign ownership matter?," Research Policy, Elsevier, Elsevier, vol. 43(4), pages 737-748.

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