Managerial Talent and Managerial Practices: Are They Complements?

Abstract

We examine the role of managerial talent and its interaction with managerial practices in determining firm performance. We build a matched firm-director panel dataset for the universe of limited liability companies in Italy, tracking individuals across different firms over time. We define managerial talent as their capacity to boost firms' total factor productivity, estimated in a two-way fixed effects model. Combining the data with survey information on a representative sample of firms, we then document that our measure of talent correlates with ex-ante and ex-post indicators of ability, i.e., managers' educational attainment and forecasting precision of the firm's future performance. Most important, we leverage information on the adoption of managerial practices within the firm to examine potential synergies between managerial talent and structured managerial practices, thus building a bridge between two separate strands in the current literature. While talent and structured practices do boost firm productivity on their own, there is evidence of complementarities between the two. These findings hold both in a cross-sectional setting and in a panel analysis that accounts for time-invariant firm heterogeneity. Overall, our results indicate that the effectiveness of managerial practices depends on the managers' ability to use them.