Hiring Stars and Their Colleagues: Exploration and Exploitation in Professional Service Firms

Abstract

This paper examines exploration and exploitation in professional service firms by focusing on the individuals who carry out the exploration and exploitation activities. Specifically, we examine the performance of star security analysts who join new firms in exploration versus exploitation roles. We find that stars hired to explore (initiate new activities) experience a short- and long-term performance decline; by contrast, stars who join new firms to exploit (reinforce existing activities) suffer only a short-term drop in performance. Stars hired in exploration roles can preserve some of their performance by moving with a group of colleagues from the originating firm. Investors view the hiring of a star analyst as value-destroying for the hiring firm regardless of whether the firm is hiring to exploit or explore, but the negative reactions are economically more extreme for exploration hires. These findings indicate that, even at the individual level, probabilities of success in exploration activities are lower than in exploitation activities, thereby reinforcing the tendency toward exploitation.

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