Firm-specific skills and hard-to-measure skills: effects of internal skill development on baseball prospects' early careers

Purpose This study assesses the relative importance of two distinct mechanisms through which internal skill development generates value – firm-specific human capital accumulation and private information generation about hard-to-measure skills – by analyzing the early career development of prospects in Major League Baseball. Design/methodology/approach Drawing on firm-specific human capital theory and information impactedness theory, I derive separate empirical tests for each mechanism and apply them to a dataset of approximately 8,000 players drafted from 1987 to 2015. I compare players who entered professional baseball directly from high school at age 18 – developing internally in a club's minor league system for three years – against players who entered after three years of college. Cox proportional hazard models are used to analyze release and trade timing; Ordinary Least Squares (OLS) regression is used to analyze error rates. Findings I find evidence that internal development gives clubs better information on prospects' hard-to-measure skills, facilitating quicker termination decisions. The findings are more ambiguous about the existence or importance of firm-specific skills. Originality/value The study provides direct empirical evidence distinguishing the relative importance of firm-specific skill accumulation and private information generation as sources of value from internal development – a distinction prior empirical work has not been designed to test. The findings demonstrate that the informational mechanism operates robustly even where firm-specific skills are theoretically minimal, suggesting that the skill evaluation value of internal development may be more general than its skill accumulation value.