Firm-Specific Human Capital, Adverse Learning, and Agency Costs: Evidence from Retail Banking


Strategic Management Journal

September 2014, vol. 35, n°9, pp.1279-1301

Departments: Strategy & Business Policy, GREGHEC (CNRS)

Keywords: Agency costs, Organizational incentives, Performance pay, Adverse learning, Firm-specific human capital

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