Knowledge, compensation, and firm value: An empirical analysis of firm communication

- We find that external communication reveals the relative location of knowledge within a management team.
- Relative knowledge as measured by communication varies with individual and firm characteristics as predicted by theory.
- CEOs with relatively more knowledge receive relatively higher compensation.
- Firms that do not adhere to communication-compensation patterns have a lower Tobin׳s Q.
- We provide evidence of the theoretically established link between knowledge, compensation, and firm value.

Knowledge is central to managing an organization, but its presence in employees is difficult to measure directly. We hypothesize that external communication patterns reveal the location of knowledge within the management team. Using a large database of firm conference call transcripts, we find that CEOs speak less in settings where they are likely to be relatively less knowledgeable. CEOs who speak more are also paid more, and firms whose CEO pay is not commensurate with CEO speaking have a lower industry-adjusted Tobin׳s Q. Communication thus appears to reveal knowledge.