Does It Pay To Retain Talent? Evidence From Debt Contracting

In this study we investigate how organization capital interacts with organizational capital volatility to affect the cost of debt. Based on the analysis of a large sample of U.S. bank loan contracts between 1990 and 2018, we use an exogenous shock to talent mobility (the adoption of Inevitable Disclosure Doctrine, IDD) to distinguish between the “firm-specific” and “key talent” view of organization capital. Our results are consistent with the “key talent” view of organizational capital. Furthermore, we show that the volatility of organization capital plays a crucial role in affecting the cost of bank loans, while this effect is attuned by the level of organization capital. High organization capital itself is associated with lower costs of bank loans after controlling for its volatility. Our study has important practical implication