This paper investigates whether and how individual managers affect corporate behavior and performance. We construct a manager-e rm matched panel data set which enables us to track the top managers across different e rms over time. We e nd that manager e xed effects matter for a wide range of corporate decisions. A signie cant extent of the heterogeneity in investment, e nancial, and organizational practices of e rms can be explained by the presence of manager e xed effects. We identify specie c patterns in managerial decision-making that appear to indicate general differences in “ style” across managers. Moreover, we show that management style is signie cantly related to manager e xed effects in performance and that managers with higher performance e xed effects receive higher compensation and are more likely to be found in better governed e rms. In a e nal step, we tie back these e ndings to observable managerial characteristics. We e nd that executives from earlier birth cohorts appear on average to be more conservative; on the other hand, managers who hold an MBA degree seem to follow on average more aggressive strategies.

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Managing with Style: The Effect of Managers on Firm Policies

We investigate conditions sufficient for identification of average treatment effects using instrumental variables. First we show that the existence of valid instruments is not sufficient to identify any meaningful average treatment effect. We then establish that the combination of an instrument and a condition on the relation between the instrument and the participation status is sufficient for identification of a local average treatment effect for those who can be induced to change their participation status by changing the value of the instrument. Finally we derive the probability limit of the standard IV estimator under these conditions. It is seen to be a weighted average of local average treatment effects.

Evolution and Rationality Some Recent Game-Theoretic Results. Identification and Estimation of Local Average Treatment Effects

We argue that managerial overconfidence can account for corporate investment distortions. Overconfident managers overestimate the returns to their investment projects and view external funds as unduly costly. Thus, they overinvest when they have abundant internal funds, but curtail investment when they require external financing. We test the overconfidence hypothesis, using panel data on personal portfolio and corporate investment decisions of Forbes 500 CEOs. We classify CEOs as overconfident if they persistently fail to reduce their personal exposure to company-specific risk. We find that investment of overconfident CEOs is significantly more responsive to cash flow, particularly in equity-dependent firms.

/pdf/ceo-overconfidence-and-corporate-investment-3ty0i8z0sv.pdf

CEO Overconfidence and Corporate Investment

We model a firm’s demand for liquidity to develop a new test of the effect of financial constraints on corporate policies. The effect of financial constraints is captured by the firm’s propensity to save cash out of cash flows (the cash flow sensitivity of cash). We hypothesize that constrained firms should have a positive cash flow sensitivity of cash, while unconstrained firms’ cash savings should not be systematically related to cash flows. We empirically estimate the cash flow sensitivity of cash using a large sample of manufacturing firms over the 1971 to 2000 period and find robust support for our theory. TWO IMPORTANT AREAS OF RESEARCH in corporate finance are the effects of financial constraints on firm behavior and the manner in which firms perform financial management. These two issues, although often studied separately, are fundamentally linked. As originally proposed by Keynes (1936), a major advantage of a liquid balance sheet is that it allows firms to undertake valuable projects when they arise. However, Keynes also argued that the importance of balance sheet liquidity is influenced by the extent to which firms have access to external capital markets (p. 196). If a firm has unrestricted access to external capital— that is, if a firm is financially unconstrained—there is no need to safeguard against future investment needs and corporate liquidity becomes irrelevant. In contrast, when the firm faces financing frictions, liquidity management may become a key issue for corporate policy. Despite the link between financial constraints and corporate liquidity demand, the literature that examines the effects of financial constraints on firm behavior has traditionally focused on corporate investment demand. 1 In an influential paper, Fazzari, Hubbard, and Petersen (1988) propose that when firms face financing constraints, investment spending will vary with the availability of internal funds, rather than just with the availability of positive net present

http://people.stern.nyu.edu/eofek/PhD/papers/ACW_Cashflow.pdf

The Cash Flow Sensitivity of Cash

We investigate whether differences in individuals’ experiences of macro-economic shocks affect longterm risk attitudes, as is often suggested for the generation that experienced the Great Depression. Using data from the Survey of Consumer Finances from 1964-2004, we find that birth-cohorts that have experienced high stock market returns throughout their life report lower risk aversion, are more likely to be stock market participants, and, if they participate, invest a higher fraction of liquid wealth in stocks. We also find that cohorts that have experience high inflation are less likely to hold bonds. These results are estimated controlling for age, year effects, and a broad set of household characteristics. Our estimates indicate that stock market returns and inflation early in life affect risk-taking several decades later. However, more recent returns have a stronger effect, which fades away slowly as time progresses. Thus, the experience of risky asset payoffs over the course of an individuals’ life affects subsequent risk-taking. Our results explain, for example, the relatively low rates of stock market participation among young households in the early 1980s (following the disappointing stock market returns in the 1970s depression) and the relatively high participation rates of young investors in the late 1990s (following the boom years in the 1990s).

/pdf/depression-babies-do-macroeconomic-experiences-affect-risk-4iiktg6dri.pdf

Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?*

https://eml.berkeley.edu/~ulrike/Papers/OCmergers_Final_JFEformat_20feb2008.pdf

Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction

/pdf/ceo-overconfidence-and-corporate-investment-3awzjbivj2.pdf

We show that measurable managerial characteristics have significant explanatory power for corporate financing decisions beyond traditional capital-structure determinants First, managers who believe that their firm is undervalued view external financing as overpriced, especially equity Such overconfident managers use less external finance and, conditional on accessing risky capital, issue less equity than their peers Second, CEOs with Depression experience are averse to debt and lean excessively on internal finance Third, CEOs with military experience pursue more aggressive policies, including heightened leverage Complementary measures of CEO traits based on press portrayals confirm the results

Geoffrey Tate

Papers

CEO Overconfidence and Corporate Investment

Who Makes Acquisitions? CEO Overconfidence and the Market's Reaction

CEO Overconfidence and Corporate Investment

CEO Overconfidence and Corporate Investment

Overconfidence and Early-life Experiences: The Impact of Managerial Traits on Corporate Financial Policies