How Do Firms Appropriate Value from Employees with Transferable Skills? A Study of the Appropriation Puzzle in Actively Managed Mutual Funds

How do firms benefit from employees with transferable skills? The prevailing view is that labor market frictions that impede employee mobility or strategies that constrain skill transferability are the primary instruments for firms to appropriate value from human capital. The empirical evidence, however, suggests that employees continue to be mobile, and firms pay premiums to attract and retain employees with transferable skills. To reconcile theory with data, we use data from the mutual-fund industry, where it is widely documented that active fund managers appropriate more value than they generate. We develop a theory of positive externalities stemming from transferable human capital that we argue accrue mostly to the firm, and provide evidence of such externalities in the mutual fund context. Empirically, we decompose the skills of mutual-fund managers into task- and firm-specific components, and argue that managers with taskspecific skills generate positive externalities at the firm level that are not reflected in their performance measured at the fund level. We advance and test empirical hypotheses on the existence of these positive unmeasured externalities by examining whether managers with task-specific skills are more likely to be associated with activities such as mentoring, increased risk taking, and generating spillovers at the firm level. Our results show that managers with task-specific skills are indeed associated with greater positive externalities, compared with managers with firm-specific skills. We discuss the implications of our results for the literature on human-capital value creation and appropriation.