Impact of Top Management Characteristics on Firm's Labor Investment Efficiency

ABSTRACT This study examines the effect of top management team (TMT) characteristics on labor investment efficiency. Specifically, we focus on TMT within‐firm experience, tenure diversity, and the pay for performance sensitivity (PPS) dispersion as three potential factors affecting the team's group dynamics leading to labor investment decisions. Using a sample of US firms from 2000 to 2019, we show that TMTs with a greater percentage of within‐firm experience, a high level of tenure diversity, and higher PPS dispersion make more efficient labor investments. Splitting the sample into over‐ and under‐investment subsamples, we find that TMT within‐firm experience reduces underinvestment in labor while tenure diversity and PPS dispersion reduce overinvestment in labor. Our study provides practical implications for corporate boards in assessing TMT's hiring and promotion, making investment decisions, and determining top executive compensations.