Selection versus talent effects on firm value

Measuring the value of labor-market hires for stock prices, be it underwriters when firms go public (IPOs) or chief executive officers (CEOs), is difficult due to selection. Opaque firms with higher costs of capital benefit more from prestigious underwriters, while productive firms benefit more from...

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Bibliographic Details
Published in:Journal of financial economics 2019-09, Vol.133 (3), p.751-763
Main Authors: Chang, Briana, Hong, Harrison
Format: Article
Language:English
Subjects:
Ability
Business insurance
CEO
Chief executive officers
Chief executives
Companies
Compensation
IPO Underpricing
Labor market
Prestige
Prices
Selection
Sorting
Talent
Talent management
Underwriters
Underwriting
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Summary:Measuring the value of labor-market hires for stock prices, be it underwriters when firms go public (IPOs) or chief executive officers (CEOs), is difficult due to selection. Opaque firms with higher costs of capital benefit more from prestigious underwriters, while productive firms benefit more from talented CEOs. Using assignment models, we show that the importance of talent (or agent heterogeneity) relative to selection (or firm heterogeneity) is measured by wage increases across agents of different compensation ranks divided by changes in output across their firms. The median of this ratio is 0.5% for underwriters and 2% for CEOs.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2019.01.001