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Optimism, attribution and corporate investment policy

Description

Chief Executive Officers (CEOs) whose observed personal option-holding patterns are not consistent with theoretical predictions are variously described as overconfident or optimistic. Existing literature demonstrates that the investment and financing decisions of such CEOs differ from those of CEOs who

Chief Executive Officers (CEOs) whose observed personal option-holding patterns are not consistent with theoretical predictions are variously described as overconfident or optimistic. Existing literature demonstrates that the investment and financing decisions of such CEOs differ from those of CEOs who do not exhibit such behavior and interprets the investment and financing decisions by overconfident or optimistic CEOs as inferior. This paper argues that it may be rational to exhibit behavior interpreted as optimistic and that the determinants of a CEO’s perceived optimism are important. Further, this paper shows that CEOs whose apparent optimism results from above average industry-adjusted CEO performance in prior years make investment and financing decisions which are actually similar, and sometimes superior to, those of unbiased CEOs.

Contributors

Agent

Created

Date Created
2016

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Analysts and corporate liquidity policy

Description

This paper examines how equity analysts' roles as information intermediaries and monitors affect corporate liquidity policy and its associated value of cash, providing new evidence that analysts have a direct impact on corporate liquidity policy. Greater analyst coverage (1) reduces

This paper examines how equity analysts' roles as information intermediaries and monitors affect corporate liquidity policy and its associated value of cash, providing new evidence that analysts have a direct impact on corporate liquidity policy. Greater analyst coverage (1) reduces information asymmetry between a firm and outside shareholders and (2) enhances the monitoring process. Consistent with these arguments, analyst coverage increases the value of cash, thereby allowing firms to hold more cash. The cash-to-assets ratio increases by 5.2 percentage points when moving from the bottom analyst-coverage decile to the top decile. The marginal value of $1 of corporate cash holdings is $0.93 for the bottom analyst-coverage decile and $1.83 for the top decile. The positive effects remain robust after a battery of endogeneity checks. I also perform tests employing a unique dataset that consists of public and private firms, as well as a dataset that consists of public firms that have gone private. A public firm with analyst coverage can hold approximately 8% more cash than its private counterpart. These findings constitute new evidence on the real effect of analyst coverage.

Contributors

Agent

Created

Date Created
2012

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Information conduit or agency cost: top management and director interlock between acquirers and targets

Description

This paper investigates the role of top management and board interlocks between acquirers and targets. I hypothesize that an interlock may exacerbate agency problems due to conflicting interests and lead to value-decreasing acquisition. An interlock may also serve as a

This paper investigates the role of top management and board interlocks between acquirers and targets. I hypothesize that an interlock may exacerbate agency problems due to conflicting interests and lead to value-decreasing acquisition. An interlock may also serve as a conduit of information and personal experience, and reduce the cost of information gathering for both firms. I find supporting evidence for these two non-mutually exclusive hypotheses. Consistent with the agency hypothesis, interlocked acquirers underperform non-interlocked acquirers by 2% during the announcement period. However, well-governed acquirers receive higher announcement returns and have better post-acquisition performance in interlocked deals. The proportional surplus accrued to an acquirer is positively correlated with the interlocking agent's ownership in the acquirer relative to her ownership in the target. Consistent with the information hypothesis, when the target's firm value is opaque, interlocks improve acquirer announcement returns and long-term performance. Interlocked acquirers are also more likely to use equity as payment, especially when the acquirer's stock value is opaque. Target announcement returns are not influenced by the existence of interlock. Finally, I find acquisitions are more likely to occur between two interlocked firms and such deals have a higher completion rate.

Contributors

Agent

Created

Date Created
2012

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From Playground to Boardroom: Endowed Social Status and Managerial Performance

Description

By matching a CEO's place of residence in his or her formative years with U.S. Census survey data, I obtain an estimate of the CEO's family wealth and study the link between the CEO's endowed social status and firm performance.

By matching a CEO's place of residence in his or her formative years with U.S. Census survey data, I obtain an estimate of the CEO's family wealth and study the link between the CEO's endowed social status and firm performance. I find that, on average, CEOs born into poor families outperform those born into wealthy families, as measured by a variety of proxies for firm performance. There is no evidence of higher risk-taking by the CEOs from low social status backgrounds. Further, CEOs from less privileged families perform better in firms with high R&D spending but they underperform CEOs from wealthy families when firms operate in a more uncertain environment. Taken together, my results show that endowed family wealth of a CEO is useful in identifying his or her managerial ability.

Contributors

Agent

Created

Date Created
2018

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Partisan Investment Cycles

Description

This paper studies the relation between alignment in partisan affiliation between a firm's management team and the president and corporate investment. Survey evidence suggest that households have higher expectations of economic growth when their preferred party controls the presidency. I

This paper studies the relation between alignment in partisan affiliation between a firm's management team and the president and corporate investment. Survey evidence suggest that households have higher expectations of economic growth when their preferred party controls the presidency. I therefore investigate whether finance professionals, specifically corporate managers, are subject to the same partisan-based optimism and make investment decisions not based on fundamentals. Consistent with the behavior displayed by the general public, I find that managers invest more and become more optimistic about their companies' prospects when their preferred party is in power. Using insider trades, I am able to separate optimism from alternative explanations such as industry sorting of partisan managers, political connections, etc. This optimism-driven increase in investment is associated with lower profitability and stock returns. Overall, managers' partisan beliefs produce heterogeneous expectations about future cash flows and distort investment decisions.

Contributors

Agent

Created

Date Created
2021