Human Capital, Management Quality, and Firm Performance Thomas J. Chemmanur* Lei Kong** Karthik Krishnan*** May 2014 Abstract We make use of a panel data set from the BoardEx database on the quality of the manage- ment teams of 4635 rms during 1999 to 2010 to analyze the relationship between the man- agement quality of rms and their long-run operating performance, current market valuations, and future long-run stock returns. We create a management team quality index using common factor analysis from various individual proxies for the quality of a rms management team, such as management team size, fraction of managers with MBAs, the average employment- and education-based connections of each manager in the management team, fraction of members with prior working experience in the top management team, and the average number of board positions that each manager serves on. We nd that this index is positively related to rms long-run operating performance, current market valuations, and future long-run stock returns. We overcome hurdles related to endogeneity by using Vietnam War draft deferment rules for graduate education. Individuals graduating from college during this period enrolled into gradu- ate degree programs for reasons unrelated to their intrinsic quality, i.e., to avoid getting drafted. Using this as an instrument, we nd a causal relationship between our management quality in- dex and rms long-run future operating performance, current market valuations, and long-run future stock returns. We also nd that rms with higher management quality are characterized by larger levels of investment and investment growth. The relationship of management quality with rm valuation and performance is stronger for rms in R&D intensive, more competitive, nancially constrained industries, and during periods of recession. JEL Classication: G32; L25 Keywords: Human Capital; Management Quality; Operating Performance; Market Valuation; Stock Return *Professor, Finance Department, Fulton Hall 440, Carroll School of Management, Boston College, Chestnut Hill, MA 02467, Tel: (617) 552-3980, Fax: (617) 552-0431, Email: chemmanu@bc.edu **PhD Candidate, Finance Department, Fulton Hall 341, Carroll School of Management, Boston Col- lege, Chestnut Hill, MA 02467, Tel: (617) 552-2062, Email: kongle@bc.edu ***Assistant Professor and Thomas Moore Faculty Fellow, 414C Hayden Hall, College of Business, Northeastern University, Boston, MA 02115, Tel: (617) 373-4707, Email: k.krishnan@neu.edu. This paper is scheduled to be presented at the 2014 WFA meeting. We would like to thank seminar participants at Boston College and the NBER Productivity Lunch seminar series. Any errors or omissions remain the responsibility of the authors.