Organization Capital and the Cross-Section of Expected Returns




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    • Eisfeldt is with Anderson School of Management, UCLA. Papanikolaou is with Kellogg School of Management, Northwestern University and NBER. We thank the editor (Cam Harvey), the Associate Editor, two anonymous referees, and Frederico Belo, Nicholas Bloom, John Cochrane, Leonid Kogan, Hanno Lustig, Joshua Pollet, Jayanthi Sunder, Lu Zhang, and seminar participants at the American Economic Association, Booth School of Business, Instituto de Estudios Superiores de la Empresa (IESE), Escuela Superior de Administracion y Direccion de Empresas (ESADE), Norwegian School of Economics, Northwestern University, Ohio State University, Society of Economic Dynamics, Stanford Institute of Theoretical Economics, Toulouse School of Economics, University of California, Los Angeles, University of Illinois at Urbana-Champaign, University of Washington, and the Western Finance Association for helpful comments and discussions. We thank Carola Frydman and Erik Loualiche for sharing their data, and Tyler Muir and Omair Syed for expert research assistance. Dimitris Papanikolaou thanks the Zell Center for financial support.


Organization capital is a production factor that is embodied in the firm's key talent and has an efficiency that is firm specific. Hence, both shareholders and key talent have a claim to its cash flows. We develop a model in which the outside option of the key talent determines the share of firm cash flows that accrue to shareholders. This outside option varies systematically and renders firms with high organization capital riskier from shareholders' perspective. We find that firms with more organization capital have average returns that are 4.6% higher than firms with less organization capital.