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Organization Capital and Intrafirm Communication

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  • Chowdhry, Bhagwan
  • Garmaise, Mark J.

Abstract

We present a dynamic model of production in which a firm’s output increases when its managers share their information. Communication of ideas depends on the quality of the firm’s internal language. We prove that firms with richer languages (i.e., more organizational capital) will have higher market values. Organizational capital generates static complementarities among incumbents which implies that firms with richer languages will experience greater employee retention and higher wages. Dynamic complementarities between intertemporal investments in language generate long-run persistence in firm market-to-book and turnover ratios. We demonstrate that the optimal compensation of incumbents includes an earnings-insensitive component that is larger in firms with richer languages. In a simple model of mergers, we show that the most value-creating mergers are those between firms with highly disparate languages.

Suggested Citation

  • Chowdhry, Bhagwan & Garmaise, Mark J., 2003. "Organization Capital and Intrafirm Communication," University of California at Los Angeles, Anderson Graduate School of Management qt8j01z46g, Anderson Graduate School of Management, UCLA.
    • Handle: RePEc:cdl:anderf:qt8j01z46g
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    1. Barro, Jason R & Barro, Robert J, 1990. "Pay, Performance, and Turnover of Bank CEOs," Journal of Labor Economics, University of Chicago Press, vol. 8(4), pages 448-481, October.
    2. Bahk, Byong-Hong & Gort, Michael, 1993. "Decomposing Learning by Doing in New Plants," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 561-583, August.
    3. K. J. Arrow, 1971. "The Economic Implications of Learning by Doing," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 11, pages 131-149, Palgrave Macmillan.
    4. Andrew Atkeson & Patrick J. Kehoe, 2002. "Measuring Organization Capital," NBER Working Papers 8722, National Bureau of Economic Research, Inc.
    5. C. Lanier Benkard, 1999. "Learning and Forgetting: The Dynamics of Aircraft Production," NBER Working Papers 7127, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Orlando Gomes, 2007. "Investment in organizational capital," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 107-113.
    2. Andrea L. Eisfeldt & Dimitris Papanikolaou, 2013. "Organization Capital and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 68(4), pages 1365-1406, August.
    3. Nathalie Greenan & Edward Lorenz, 2009. "Learning Organisations: the importance of work organisation for innovation," Working Papers halshs-01376968, HAL.
    4. HIROTA Shinichi & KUBO Katsuyuki & MIYAJIMA Hideaki, 2007. "Does Corporate Culture Matter? An Empirical Study on Japanese Firms," Discussion papers 07030, Research Institute of Economy, Trade and Industry (RIETI).

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