Human judgments of executive teams’ human capital

Abstract

We provide the first large-sample evidence on whether human-generated judgments of the human capital of a firm’s executive team are informative about future performance. Using a novel dataset from the banking industry, we find that banks with better human capital have fewer future non-performing loans and are less likely to fail. These results are robust to holding the overall ex-ante health of the bank constant and including bank fixed effects. We further find that better human capital is associated with more intense loan monitoring and timelier loan loss recognition. Finally, we find that the association between human capital and future performance is amplified when perceived human capital diverges from the bank’s overall performance and when macroeconomic uncertainty is higher.