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Assistant Professor of Finance Dimitris Papanikolaou won the Smith Breeden Prize for 2013's best paper in the prestigious "Journal of Finance."

Dimitris Papanikolaou

Investing in people

Kellogg professor wins top award for paper on the profit of talent

By Paul Dailing

1/30/2014 - Companies that invest in people are riskier investments and, as a result, those firms earn higher returns on average

That’s the insight that earned Assistant Professor of Finance Dimitris Papanikolaou the 2013 Smith Breeden Prize for best paper of the year in the Journal of Finance, the world’s premier journal for financial research.

The Journal of Finance receives roughly 1,300 submissions a year, Kellogg Finance Department Chair Kathleen Hagerty said. Only 5 percent of those submissions are accepted for publication.

And only one paper wins the Smith Breeden, she said.

“Only outstanding research is published in the Journal of Finance and to be named the best paper among that elite group of papers is impressive,” Hagerty said.

Investing in people

The paper, which Papanikolaou co-authored with Andrea Eisfeldt of the UCLA Anderson School of Management, compares historic returns of companies that invest in their intangible assets – their people – and those that don’t.

“Firms that have a lot of organizational capital have higher returns on average,” Papanikolaou said. “If you invest in those firms, on average your return will be roughly 4.6 percent a year higher than if you were investing in firms that have low levels of intangibles.”

However there is a risk for the company and the investors. People can quit and take their value elsewhere.

“A lot of these intangibles are embodied in people and people can walk out the door,” Papanikolaou said. “As a company, you have to be able to assess the risk of investing in these intangibles. You can’t nail people to the floor.”

The paper is the first major work to examine organizational capital in a market sense, turning the intangible value of the best executives, sharpest managers and savviest engineers into dollars and cents for investors.

“People that work for a particular firm, they add some value to the firm, to the shareholders,” he said. “They don’t necessarily get paid all the value they’re adding; there’s some surplus that’s created.”

“The tricky part is the surplus can disappear if your best assets walk out the door.”