Managerial Human Capital and Investment Strategy in Organizations

Abstract

We propose and test a parsimonious agency model in which more general managerial skills, through their effects on optimal managerial incentives and effort, and in turn on task/investment assignments, lead to growth strategies based on external (rather than internal) investments; a relationship that is exacerbated by the degree of agency concerns in the organization. Using U.S. data, and variation in enforceability of non-compete agreements as an instrument for general managerial skills, we find robust evidence of a causal impact of general managerial skills on firms’ propensity for external investments, and of the exacerbating effects of agency concerns.