Manager Allocation and Firm Size

Abstract: Managerial talent influences firm growth and expansion, yet larger firms may have an advantage in mitigating managerial turnover by sourcing replacements internally. This paper examines the relationship between manager allocation and firm size. Using German administrative data, I document that internal promotions account for 40% of managerial inflows, disproportionately concentrated in larger firms. Event study regressions show that external managerial hires are associated with firm growth, while internal promotions have a more muted effect on size. To rationalize these findings, I develop a firm dynamics model with frictional search for managerial positions, where firms optimally choose their size while accounting for manager turnover. The model shows that reliance on internal or external hires depends critically on firm size, influencing both talent distribution and firm productivity.