Oliver Boguth, David Newton, and Mikhail Simutin
Firms with high levels of organization capital, a firm-specific production factor provided by key employees, are known to be risky and earn high stock returns. We argue that fragility of organization capital – its sensitivity to disruptions – is an independently important dimension of this risk. We proxy for fragility by the size of the top management team and show that firms with small teams outperform by 5% annually. The return spread increases with organization capital and correlates with outside options of top executives. Further supporting our interpretation, shocks to team composition from unexpected CEO deaths cause larger losses in smaller teams.