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. 1 We note that we develop a novel and replicable empirical methodology to investigate these contingency factors. Our method also provides one possible path for estimating rent appropriation in firms, which Coff (1999) has highlighted as a major challenge in organizational research.
Dominant logic is the manner in which firms conceptualize and make critical resourceallocation decisions, and over time develop mental maps, business models, and processes that become organizational recipes. This study compares and contrasts the dominant logic of Polish entrepreneurial firms. We find evidence that a dominant logic characterized by external orientation, proactiveness, and simplicity of routines significantly influences the performance of entrepreneurial firms in this emerging economy. These dominant logic characteristics of high performers serve as a key intangible resource in transition economies that are characterized by the absence of strong institutions and resource constraints. Future research in this critical domain should include how dominant logic needs in transition economies evolve over time as the institutional environment matures and market mechanisms become more solidified.
This paper explores the link between subsidiary performance feedback and internal governance mechanisms in multiunit firms. A central premise of performance-feedback models is that performance below aspirations is associated with increased risk tolerance and thereby with a higher likelihood of taking excessive risks in resource allocation decisions. Building on this observation, we contend that the headquarters of multiunit firms take this association into account in the design of internal (i.e., headquarters-subsidiary) governance mechanisms. Accordingly, a subsidiary's performance-aspiration gap (below aspirations) is positively associated with the headquarters' oversight of its resource allocation decisions and negatively associated with the provision of incentive schemes that promote risk taking. Regression results, using data on subsidiaries in France between 1998 and 2004, support our hypotheses and show that subsidiaries performing below historical and social aspirations are less likely to be given discretion in investment decisions and incentivized by cash bonuses. In the supplementary analyses, we also provide suggestive evidence that subsidiary performance problems in multiunit firms trigger structural adaptation in the internal governance mechanisms in pursuit of regaining fit.
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