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 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.
We thank Toni Whited (Editor) and an anonymous referee for many helpful comments. We are also extremely grateful to Jeffrey Kubik for many helpful comments and to Jay Ritter for providing the IPO underpricing data. We also thank Bernard Salanie, Pierre-André Chiappori, Raj Iyer, Antoinette Schoar, Marcin Kacperczyk, Pengjie Gao, Bruno Biais, Doug Diamond, Eugene Fama, Diego Garcia, Vish Vishwanathan, Sheridan Titman, Laura Starks and seminar participants at Chicago Booth Business School, Imperial University, Gerzensee Corporate Finance Conference, Nanyang Technological University, AFA 2017, Conference on Finance and Accounting, University of Wisconsin, University of Texas at Austin and Hong Kong University of Science and Technology for helpful suggestions. This paper subsumes our earlier work circulated as "Assignment of Stock Market Coverage". The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.