Logo Logo

Organization Capital and the Cross-Section of Expected Returns, Journal of Finance

Abstract

Organization capital is a production factor that is embodied in the firm's key talent and has an efficiency that is firm specific. As a result, both shareholders and management have a claim on the cash flows accruing from organization capital. Because the division of rents between shareholders and key talent can systematically vary over time, shareholders investing in organization capital are exposed to additional risks. In our model, key talent can transfer a fraction of the firm's organization capital to a new enterprise, and the benefits of this reallocation vary systematically. This outside option determines the division of cash flows from organization capital between shareholders and key talent, and renders firms with high organization capital riskier. We construct a measure of organization capital based on readily available accounting data and find that firms with more organization capital relative to their industry peers outperform firms with less organization capital by 4.7% per year. This dispersion in risk premia is not explained by the CAPM, the Fama and French (1993) or Carhart (1997) models. Our model offers additional testable implications that are supported by the data.

Type

Article

Author(s)

Andrea Eisfeldt, Dimitris Papanikolaou

Date Published

2013

Citations

Eisfeldt, Andrea, and Dimitris Papanikolaou. 2013. Organization Capital and the Cross-Section of Expected Returns. Journal of Finance. 68(4): 1365-1406.

KELLOGG INSIGHT

Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more

COURSE CATALOG

Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.
LEARN MORE

DEGREE PROGRAMS

Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more