Social Capital and Asset Prices: The Fragility of Small Teams

Abstract

Firms with high levels of organization capital, a firm-specific production factor provided by key employees, are known to be risky and earn high stock returns. We argue that the fragility of organization capital -- its sensitivity to potential disruptions -- is an independently important determinant of risk. We proxy for fragility by the size of the top management team, and show that firms with small teams outperform firms with big teams by 6% annually in the cross-section. To validate our proxy, we show that the return spread increases in the level of organization capital, and that shocks to team composition from unexpected CEO deaths cause larger value losses in smaller teams. A factor capturing organization capital fragility exhibits an exceptional risk-return trade-off and is priced in the cross-section of stocks.