Selection versus Talent Effects on Firm Value
NBER Working Paper No. 24672
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.
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Document Object Identifier (DOI): 10.3386/w24672
Published: Briana Chang & Harrison Hong, 2019. "Selection versus Talent Effects on Firm Value," Journal of Financial Economics, .