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Key Human Capital

Published online by Cambridge University Press:  20 February 2017

Ryan D. Israelsen  and
Scott E. Yonker
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Abstract

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Firms whose human capital is concentrated in a few irreplaceable employees lack diversification in their human capital stock, exposing them to key human capital risk. Using disclosures of “key man life insurance” to measure this risk, we show that exposed firms are riskier. These younger, smaller, growth firms have abnormally high volatility, and following announcement of key employee departures, the most exposed firms lose 8% of their value. Key employees tend to be highly educated. They are four times more likely to hold PhD degrees than top managers, and firms with key human capital are more innovative.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 1 , February 2017 , pp. 175 - 214
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

Footnotes

1 We thank Zhi Da, Clifton Green, Yaniv Grinstein, Jarrad Harford (the editor), Andrew Karolyi, Chris Parsons, Veronika Pool, Noah Stoffman, and Rebecca Zarutskie (the referee) for detailed comments and participants of seminars at Cornell University, Utah State University, the Florida State Sun Trust Conference, the 2012 Conference on Financial Economics and Accounting (CFEA) at the University of Southern California, and the Indiana University Finance Brown Bag for helpful comments. We thank Jimmy Holden for excellent research support. Previous versions of this paper were circulated under the title “The Key Man Premium.”

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