The Specialist Discount: Negative Returns For MBAs With Focused Profiles In Investment Banking
Tulane University – A.B. Freeman School of Business
Damon J. Phillips
At this year's annual Robin Hood conference, which was held virtually, the founder of the world's largest hedge fund, Ray Dalio, talked about asset bubbles and how investors could detect as well as deal with bubbles in the marketplace. Q1 2021 hedge fund letters, conferences and more Dalio believes that by studying past market cycles Read More
Columbia University – Columbia School of Business
When is being specialized detrimental? Leveraging scholarship that links the sociological notion of identity to the advantages of labor market specialization, we provide arguments and evidence to understand when labor market specialization disadvantages job candidates. Specifically, we formulate three conditions under which specialization becomes disadvantageous, and then test this in a context that exemplifies these conditions: the market for graduating MBAs. Using rich data on two graduating cohorts in 2008 and 2009 from a top-tier U.S. business school graduate program, we show that “focused” MBA graduates with profiles of being specialists with respect to their activities prior to, during, and after matriculation, receive fewer job offers and earn lower starting bonus compensation than those graduates who did not focus. Specifically, our models show that candidates focused in investment banking were less than half as likely to receive multiple offers and earned over $20,000 less in starting bonus compensation than equivalent, but unfocused candidates entering the field. Our theory and findings contribute to the literature on market identities; with implications for the design of current MBA curricula and advisory activities.
The Specialist Discount: Negative Returns For MBAs With Focused Profiles In Investment Banking – Introduction
Over the past decade a growing number of studies point to a positive association between the degree of specialization of a producer and its evaluation by critics, employers, clients, or customers. Producers spanning multiple categories are argued to suffer market penalties as evaluators experience discomfort, confusion, or conflict. Advantages instead go to producers who focus as specialists such that they are clear members of the focal category. This positive association has developed both theoretical footing (Hannan, Polos, and Carroll, 2007) as well as an expanding set of evidence in the sociological and management literature (Hsu 2006; Hsu, Koçak, and Hannan, 2009; Leung and Sharkey, 2009).
While the bulk of the scholarship on the topic is studied at the firm level, complimentary arguments have more recently been applied to individuals in labor markets (Zuckerman et. al., 2003; Ferguson and Hasan, 2013; Leung, 2013). And while this research emphasizes the link between a candidate’s past labor market experiences and the sociological concept of (labor) market identity, it dovetails with a tradition in labor economics which identifies specialized employees as providing skill-based advantages for their employers (Becker, 1957, 1962). Indeed, it would seem that the first epigraph is correct: in order to maximize the rewards of employment, a potential employee (or “candidate”) should present herself to hiring firms as focused a specialist as possible, especially if that potential employee were beginning her career with a less proven track record (Bidwell et al, 2013).
However, we argue and provide evidence that a closer inspection of recent theory and evidence points to three conditions which, in combination, lead to a different conclusion where focusing as a specialist leads to negative – rather than positive – outcomes on the labor market. They are: (1) when the hiring firm’s screening process is sufficiently rigorous to produce a relatively reliable indicator of quality, (2) when the candidate is perceived to have agency over her past experiences and skills that make up the profile presented to the labor market, and (3) when specialists are the modal candidate rather than the statistically rare one.
As we will develop below, labor markets with rigorous screening processes (condition one) diminish the advantage of a focused candidate by attenuating much of the uncertainty on quality, effort, commitment, and reliability that past studies have emphasized as grounds for privileging candidates who are more focused or specialized. This is particularly relevant when one’s educational (curricular) choices are part of the information that employers examine since these constitute the career history directed by the candidate (condition two), rather than those components of career history that were exogenously determined. Moreover, when specialists are also common rather than rare (condition three), specialization becomes more akin to commodification rather than a scarce, coveted resource that employers find costly to substitute.
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