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Organization Capital and the Cross-Section of Expected Returns

  • ANDREA L. EISFELDT
  • DIMITRIS PAPANIKOLAOU

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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File URL: http://hdl.handle.net/10.1111/jofi.2013.68.issue-4
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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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  1. Robert E. Hall, 2000. "The stock market and capital accumulation," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
  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. Andrew Atkeson & Patrick J. Kehoe, 2005. "Modeling and measuring organization capital," Staff Report 291, Federal Reserve Bank of Minneapolis.
  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. Dimitris Papanikolaou, 2008. "Investment-Specific Technological Change and Asset Prices," 2008 Meeting Papers 637, Society for Economic Dynamics.
  6. Vojislav Maksimovic, 2001. "The Market for Corporate Assets: Who Engages in Mergers and Asset Sales and Are There Efficiency Gains?," Journal of Finance, American Finance Association, vol. 56(6), pages 2019-2065, December.
  7. Rosen, Sherwin, 1972. "Learning by Experience as Joint Production," The Quarterly Journal of Economics, MIT Press, vol. 86(3), pages 366-82, August.
  8. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
  9. Prescott, Edward C & Visscher, Michael, 1980. "Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 446-61, June.
  10. Adriano Rampini & Andrea Eisfeldt, 2005. "Financing Shortfalls and the Value of Aggregate Liquidity," 2005 Meeting Papers 889, Society for Economic Dynamics.
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