This paper investigates whether and how individual managers affect corporate behavior and performance. We construct a manager-firm matched panel data set which enables us to track the top managers across different firms over time. We find that manager fixed effects matter for a wide range of corporate decisions. A significant extent of the heterogeneity in investment, financial and organizational practices of firms can be explained by the presence of manager fixed effects. We identify specific patterns in managerial decision making that appear to indicate general differences in “style” across managers. Moreover, we show that management style is significantly related to manager fixed effects in performance and that managers with higher performance fixed effects receive higher compensation and are more likely to be found in better governed firms. In a final step, we tie back these findings to observable managerial characteristics. We find 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.

Does CEO overconfidence help to explain merger decisions? Overconfident CEOs overestimate their ability to generate returns. As a result, they overpay for target companies and undertake value-destroying mergers. The effects are strongest if they have access to internal financing. We test these predictions using two proxies for overconfidence: CEOs' personal overinvestment in their company and their press portrayal. We find that the odds of making an acquisition are 65 % higher if the CEO is classified as overconfident. The effect is largest if the merger is diversifying and does not require external financing. The market reaction at merger announcement (–90 basis points) is significantly more negative than for non-overconfident CEOs (–12 basis points). We consider alternative interpretations including inside information, signaling, and risk tolerance.

Executives can only impact …rm outcomes if they have in‡uence over crucial decisions. Based on this idea we develop and test the hypothesis that …rms whose CEOs have more decision-making power should experience more variability in performance. We construct proxies for the CEO’s power to in‡uence decisions and show that stock returns are signi…cantly more variable for …rms run by powerful CEOs. We …nd similar results using alternative measures of performance. These …ndings suggest that the interaction between executive characteristics and organizational variables may have important consequences for …rm performance. 1 In some …rms the CEO makes all the major decisions. In other …rms decisions are more clearly the product of consensus among the top executives. The distribution of decision-making power within …rms should therefore a¤ect which decisions are made. Managerial decisions may or may not a¤ect …rm outcomes, but if they do, both executive characteristics and organizational variables should be important determinants of …rm performance.

In a model of career concerns for experts, when is a principal hurt from observing more information about her agent? This paper introduces a distinction between information on the consequence of the agent’s action and information directly on the agent’s action. When the latter kind of information is available, the agent faces an incentive to disregard useful private signals and act according to how an able agent is expected to act a priori. This conformist behavior hurts the principal in two ways: the decision made by the agent is less likely to be the right one (discipline) and ex post it is more difficult to evaluate the agent’s ability (sorting). The paper identifies a necessary and sufficient condition on the agent signal structure under which transparency on action is detrimental to the principal. The paper also shows the existence of complementarities between transparency on action and transparency on consequence. The results on the distinction between transparency on action and transparency on consequence are then used to interpret existing disclosure policies in politics, corporate governance, and delegated There is a widespread perception, especially among economists, that transparency is a beneficial

Researchers have long been interested in how an executive’s self-concept affects his or her behav-iors, but have lacked a theoretically grounded, validated construct for conducting systematic inquires. The concept of ‘core self-evaluation ’ (CSE), which has been recently validated in the psychology literature, concisely encompasses and consolidates the common, overlapping portions of four previously unconnected personality dimensions: self-esteem, self-efficacy, locus of con-trol, and emotional stability. CSE has great potential to provide substantial leverage for research on executive self-concept. We review and reconcile prior research on related constructs in exec-utive settings (including narcissism, hubris, and overconfidence) and argue that CSE should be adopted as a robust, well-validated umbrella construct for research on executive self-concept. Indeed, a very high level of CSE, or hyper-CSE, aligns closely with what is often colloquially called ‘hubris. ’ We anticipate that hyper-CSE executives—who possess supreme levels of self-confidence, self-potency, and conviction that they will prevail—will manifest this trait in their job behaviors. We develop a set of integrated propositions that describe the implications of CSE for strategic decision processes, strategic choices, and organizational performance. Finally, we propose additional avenues for research. Copyright 2005 John Wiley & Sons, Ltd. All the extraordinary men I have known were extraordinary in their own estimation.

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Experimental and capital market evidence indicates that individuals prefer proximate and familiar investments; sticking to current consumption/investment positions, and choice alternatives positioned as default options. We offer an integrated explanation for these effects based upon fear of change and of the unfamiliar. We model fear of change as a tendency for individuals, in evaluating deviations from familiar choices in the face of model uncertainty, to focus on the worst-case scenarios. Individuals evaluate buying versus selling under different probability distributions, which induces a gap between willingness to pay and willingness to accept that increases with both the degree of uncertainty and risk. Similar reasoning applies to preference for the status quo options, and excessive inertia in individual choices. The model thereby offers an explanation for the limited diversification of investors; special cases include the home bias puzzle and the preference of individuals to invest in company stock. In calibrations we find that individuals may hold relatively few asset classes in their portfolios; and that the observed magnitude of home bias can be consistent with a reasonable level of model uncertainty. The model also offers an explanation for attention effects wherein a large amount of publicity for a stock increases demand for it even if the news is on average neutral.

Executive Compensation and Investor Clientele Executive compensation has increased dramatically in recent times, but so has trad-ing volume and individual investor access to financial markets. We provide a model where some managers understate asset values through misleading statements in order to have enough of a cushion to compensate themselves. Owing to a lack of sophistication or näıveté, possibly arising from high opportunity costs of learning about accounting conventions and financial markets, small investors do not ascertain the extent of this behavior. Expected compensation is therefore higher when small investors form a more significant clientele in the market for a firm’s stock. Increased precision of private in-formation deters the entry of small investors and may keep executive compensation in check. Technologies that lower the cost of trading facilitate entry of small investors and raise expected compensation. Such compensation can in general be reduced through appropriate regulation and transparent disclosures. Empirical tests provide support to the key implication of the model that indirect executive compensation is higher in stocks with more retail investor participation. 1

This thesis is aimed to empirically investigate the performance impact of frequent acquisitions as an aggressive merger and acquisition (M&A) strategy for an acquiring firm. In literature related to the study of M&A, a common question is whether acquisitions improve the performance of acquirers. Neither theoretical nor empirical studies have a clear view on the performance effect of M&A. Some argue positively and some are opposite. Although existing research are mixed for their arguments, a takeover is commonly perceived as a shock to the firm with a constant effect on changing business performance. This static perception of M&A creates a difficulty in explaining why firms acquire others when the performance effect is negative. To address the issue, this thesis examines the M&A effect dynamically with taking into account the role of merger frequency in affecting performance. On the basis of a large sample that consists of about 14,000 acquisitions from more than 100 countries over last 12 years, the thesis finds that the investors perceive a lower value if the acquiring firm is involved in frequent mergers. This is because more

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