Les Cahiers de Recherche - HEC Paris
Douglas H. Frank Jr.
Firm-Specific Human Capital, Organizational Incentives, and Agency Costs: Evidence from Retail Banking
() and Tomasz Obloj
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
Keywords: FSHC; firm-specific human capital; firm performance; incentives; multiunit retail bank; (follow links to similar papers)
JEL-Codes: G00; (follow links to similar papers)
41 pages, May 16, 2013
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