# Estimate Organization Capital

This post explains the estimation of organization capital (Gao, Leung, and Qiu 2021). As in Eisfeldt and Papanikolaou (2013), we obtain firm-year accounting data from the Compustat and compute the stock of organization capital for firms using the perpetual inventory method that recursively calculates the stock of OC by accumulating the deflated value of SG&A expenses.

## Organization Capital

\[ OC_{i,t} = (1-\delta_{OC})OC_{i,t-1} + \frac{SGA_{i,t}}{CPI_t} \tag{1}\]

where \(SGA_{i,t}\) is firm \(i\)’s SG&A expenses in year \(t\), \(CPI_t\) is the consumer price index, and \(\delta_{OC}\) is the depreciation rate of OC stock, which is set to be 15% as used by the U.S. Bureau of Economic Analysis (BEA). The initial value of OC stock is set to:

\[ OC_{i,0} = \frac{SGA_{i,1}}{g+\delta_{OC}} \tag{2}\]

where \(g\) is the average real growth rate of firm-level SG&A expenses, which is 10% in Eisfeldt and Papanikolaou (2013) or specific for an industry-decade in Li, Qiu, and Shen (2018).

## Code

This code estimates the organization capital for all Compustat firm-years.

Note that it requires an external dataset of CPI. You need to name it `cpiaucsl`

and store it in your WRDS home directory.

Lastly, if you use this code above, please consider citing the following article for which it was written.

Gao, M. Leung, H. and Qiu, B. (2021). Organization Capital and Executive Performance Incentives,

Journal of Banking & Finance, 123, 106017.

## References

*The Journal of Finance*68 (4): 1365–1406. https://doi.org/10.1111/jofi.12034.

*Journal of Banking & Finance*123: 106017. https://doi.org/10.1016/j.jbankfin.2020.106017.

*The Journal of Financial and Quantitative Analysis*53 (4): 1871–1909. https://www.jstor.org/stable/26592002.