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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

    ()

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," Les Cahiers de Recherche 999, HEC Paris.
  • Handle: RePEc:ebg:heccah:0999
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    Cited by:

    1. repec:bla:stratm:v:38:y:2017:i:2:p:232-254 is not listed on IDEAS
    2. 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.
    3. 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.
    4. Michael Housman & Dylan Minor, 2015. "Toxic Workers," Harvard Business School Working Papers 16-057, Harvard Business School, revised Nov 2015.
    5. 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.

    More about this item

    Keywords

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

    JEL classification:

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

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