Employee Departure from Organizations: Three Empirical Essays

Abstract

My dissertation includes three essays which focus on employee departure from organizations. In the first two essays, I study how employee departure allows individuals to capture more value from their firms. The third essay examines the effect of employee departure on firm performance. Each essay identifies an important theoretical puzzle or tension related to employee departures and sheds light on its resolution through careful research design. In total, this dissertation aims to challenge the way that researchers typically think about employee departures, both theoretically and empirically.

The theoretical puzzle in the first essay relates to the connection between the failure of one firm and the birth of other firms. Does the failure of a rival firm cause the employees of existing firms to create entrepreneurial startups? On the one hand, theory suggests that the answer is yes - rival failures may release resources that potential entrepreneurs can use to start new firms. On the other hand, theory suggests that the answer is no - rival failures indicate to potential entrepreneurs that the environment is not munificent enough to support new entry. Using US Census data on the legal services industry, I disentangle these two arguments by examining law firm failures that are preceded by the unexpected deaths of highly paid attorneys. I find strong evidence that these quasi-random failures (which are likely to be weakly related to the broader economic environment) cause attorneys in rival firms to create startups, while other types of rival failures depress entry rates, probably because they proxy for weakness in the local industry. This essay thus provides a theoretical rationale for when the failure of one firm will lead to the creation of another while demonstrating an often-discussed but rarely demonstrated positive side effect of firm failure - a failed firm provides the component parts for new organizations.

The puzzle in my second essay relates to the effect that one employee's departure has on the bargaining power and monetary earnings of his or her colleagues. This issue is likely particularly salient for members of underrepresented groups within an organization, such as women in American law firms, which, like the first essay, is the context of this study. Theory might dictate that the departure of a highly paid woman would hurt her female colleagues' earnings by reducing their bargaining power through the elimination of a mentor and advocate. However, an alternative mechanism suggests that the departure of a highly paid woman might provide her colleagues with increased bargaining power due to a relative scarcity of women in the organization.

Using unexpected death as a stand-in for departure, I find that women experience an 8% average increase in earnings after a female colleague passes away suddenly. This increase is significantly larger than what women experience when the deceased colleague is male, and it outpaces gains that male attorneys experience when a colleague of either gender passes away. Additional analyses suggest that the departure of a woman from a law firm may imbue her female colleagues with increased bargaining power related to client acquisition or the firm's interest in maintaining gender diversity. The primary contribution of this essay is to point out a paradox related to the bargaining power of underrepresented groups. While much of the organizations' literature suggests that a group's overall bargaining power will increase as a function of the group's size, I find that an individual's bargaining power increases as the size of her overall group shrinks.

The third essay extends the literature connecting employee departures and organizational performance by inserting the firm's manager in the causal process linking employee departure to organizational performance. The theoretical puzzle I address in this essay is whether managerial tenure weakens or exacerbates employee level turnover's negative effect on organizational performance. Managers with longer tenure may have superior knowledge of their firm's routines and remaining stock of human resources, allowing them to respond effectively to key employee departure. However, theories related to organizational inertia suggest an opposite effect: managerial stability may reduce an organization's ability to respond to change. I analyze data from the National Football League to test this argument. Using injuries to quarterbacks as a quasi-random source of employee departure and casting the head coach as the team's top manager, I find support for the second argument. Analyses indicate that NFL teams whose coaches have longer tenure perform worse following quarterback injury. The contribution of this essay is to show that stability at one level of the organization can exacerbate turmoil at another level, perhaps due to the ossification of the organization's ability to alter its routines.