Organization Capital and the Cross-Section of Expected Returns
Source: Eisfeldt & Papanikolaou (2013) · The Journal of Finance · DOI: 10.1111/jofi.12034
TL;DR
Organization capital — productive know-how embodied in a firm's key talent — is a claim shared between shareholders and that talent. Because key talent can capture rents when its outside option is good, high-organization-capital firms are riskier to shareholders and earn higher returns: a long/short on organization capital earns ~4.7% per year (sample 1970–2008).
What anomaly it documents
Predictor: organization capital, built by capitalizing past SG&A.
Direction: positive — high organization capital → higher returns.
Shape: ~4.7%/yr long/short with a high Sharpe ratio; a risk-based premium.
OSAP predictor: OrgCap.
How to construct it
Sorting variable: organization capital (perpetual-inventory capitalization of SG&A, scaled by assets).
Universe: CRSP common stocks (1970–2008).
Portfolio formation: rank into organization-capital deciles (often industry-adjusted).
Long / short: long high, short low.
Weighting: value-weighted.
Rebalancing: annual.
Evidence and replication
Period
Notes
Source
1970–2008
~4.7%/yr long/short premium; risk tied to key-talent outside option
this paper
OOS (post-2013)
part of the intangibles asset-pricing literature
post-publication
OSAP (OrgCap)
replicates
Chen & Zimmermann 2022
Why it might work
Risk sharing with talent: when outside options are good, talent captures more rents, exposing shareholders to systematic risk.
Intangible capital: accounting ignores organization capital, so it is omitted from book value.
Limitations and risks
Measurement: capitalizing SG&A into 'organization capital' needs strong assumptions.
Intangibles overlap: correlated with R&D, profitability, value-via-intangibles.
Model dependence: rests on the talent-outside-option mechanism.
Key references
Eisfeldt, A. & Papanikolaou, D. (2013) — Organization Capital and the Cross-Section of Expected Returns — Journal of Finance — DOI: 10.1111/jofi.12034
Peters, R. & Taylor, L. (2017) — Intangible Capital and the Investment-q Relation — JFE
Provenance: verified/generated from the paper's full text.
