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

Author

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  • Frank Jr. , Douglas H.
  • Obloj , Tomasz

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.

Suggested Citation

  • Frank Jr. , Douglas H. & Obloj , Tomasz, 2013. "Firm-Specific Human Capital, Organizational Incentives, and Agency Costs: Evidence from Retail Banking," HEC Research Papers Series 999, HEC Paris.
    • Handle: RePEc:ebg:heccah:0999
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    Citations

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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, vol. 43(4), pages 737-748.
    2. Roy Mersland & Daudi Pascal & Leif Atle Beisland, 2016. "The influence of CEO power on agency costs in non-profit organisations: evidence from the global microfinance industry," Working Papers CEB 16-045, ULB -- Universite Libre de Bruxelles.
    3. Olivier Chatain & Philipp Meyer-Doyle, 2017. "Alleviating managerial dilemmas in human-capital-intensive firms through incentives: Evidence from M&A legal advisors," Strategic Management Journal, Wiley Blackwell, vol. 38(2), pages 232-254, February.
    4. Liyu He & Sue Wright & Elaine Evans, 2021. "The impact of managerial discretion on fair value information in the Australian agricultural sector," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 1897-1930, April.
    5. Eva Crespo-Cebada & Carlos Díaz-Caro & Aurora E. Rabazo-Martín & Edilberto J. Rodríguez-Rivero, 2021. "Do Narcissistic Managers Prefer Incentive Systems Based on Financial Instruments? An Analysis Based on Choice Experiments," Sustainability, MDPI, vol. 13(3), pages 1-13, January.
    6. Kräkel, Matthias, 2021. "On the delegation of authority," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 965-981.
    7. Kräkel, Matthias, 2018. "Empowerment and the Dark Side of Delegation," IZA Discussion Papers 11289, Institute of Labor Economics (IZA).
    8. Ian W. Jones & Michael G. Pollitt, 2016. "How UK Banks are Changing Their Corporate Culture & Practice Following the Financial Crisis of 2007-08," Working Papers wp482, Centre for Business Research, University of Cambridge.
    9. Michael Housman & Dylan Minor, 2015. "Toxic Workers," Harvard Business School Working Papers 16-057, Harvard Business School, revised Nov 2015.
    10. Raiswa Saha & Shashi & Roberto Cerchione & Rajwinder Singh & Richa Dahiya, 2020. "Effect of ethical leadership and corporate social responsibility on firm performance: A systematic review," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 27(2), pages 409-429, March.

    More about this item

    Keywords

    FSHC; firm-specific human capital; firm performance; incentives; multiunit retail bank;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General

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