Co-Worker-Specific Investments and Stability of Top Management Teams∗

We investigate the contribution of co-worker-specific investments to the value of employment relationships between senior executives and firms. Given the difficulty in directly measuring co-worker-specific human capital, we take an indirect approach by analyzing the change in the composition of top management teams when a key member of the team (the CEO) departs. Our empirical analysis establishes several facts that are consistent with coworker-specific investments being an important determinant of management team stability. We show that non-CEO turnover increases around the time of a CEO change, that this relationship is particularly strong if the new CEO is relatively new to the firm, and that the association between non-CEO turnover and CEO turnover depends on the length of prior co-worker relationships between the manager and both the departing and incoming CEO. We consider other explanations for these results, but argue that they are not generally consistent with the evidence. ∗Hayes: Graduate School of Business, University of Chicago. [email protected]. Oyer: Graduate School of Business, Stanford University. oyer [email protected]. Schaefer: Kellogg School of Management, Northwestern University. [email protected]. We are grateful to the the American Compensation Association’s Emerging Scholars Program and the General Motors Center for Strategy Research at Kellogg for support. Thanks to seminar participants at Stanford, Michigan, Wharton and the Federal Reserve Bank of New York’s November 2001 Conference on Corporate Governance in Banking and Financial Services Industry. Thanks also to Charles Himmelberg for comments and suggestions, and to Kevin Hallock for generously sharing his data on layoff announcements by Fortune 500 firms.