Lateral hiring and the performance of professional service firms: the moderating effects of leverage ratio

Abstract

We theorized and tested the performance implications of the lateral hiring by professional service firms (i.e. law firms). Using a longitudinal dataset of lateral partner hires in 148 US law firms between the years of 2004 and 2008, the results indicated that the size of lateral hiring had a reversed U-shape relationship with the financial performance of a firm. In addition, the leverage ratio (i.e. the ratio between associate lawyers and partners) significantly moderated the reversed U-shape relationship between lateral hiring and firm performance, such that the placement of the bend in the curvilinear relationship, that is, the threshold, occurred more quickly at a low than at a high leverage ratio. This study contributes to the literature on strategic human resource management in professional service firms by providing empirical evidence on the effect of lateral hires and by emphasizing that lateral partner hiring should be considered with other important HR issues to fully capitalize lateral partners.

Keywords::

• firm performance
• human capital structure
• lateral hiring
• leverage ratio
• professional service firms

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

^1. Associate lawyers are also acquired from other law firms; however, partner lawyers are more critical for law firm performance compared with associate lawyers because of their advanced knowledge, industry experiences, social capital and ability to mentor associate lawyers (cf. Hitt et al., 2001). Thus, we focus on lateral partner hiring to explore the effect of lateral hiring on firm performance.

^2. Some researchers (e.g., Miller, 2006; Ndofor, Sirmon, & He, 2011; Sirmon & Hitt, 2009) controlled for alternative performance measures instead of lagged firm performance. Thus, we ran additional analysis with a prior profitability (obtained by dividing profits per partner by revenue per lawyer) as a control and found that the main results were the same as the ones with lagged firm performance as a control variable.

Additional information

Funding

This work was supported by Hankuk University of Foreign Studies Research Fund of 2014.