CEO Stress, Aging, and Death (with M. Borgschulte, C. Liu, and U. Malmendier)
The Journal of Finance, forthcoming
PDF NBER WP CEPR DP
Presented at (selected conferences only, * by coauthor): NBER Organizational Economics Fall 2019 Meeting*, Finance, Markets, and Organizations (FOM) Conference 2019, AFA 2020*, NBER Aging and Health 2022, Chicago Booth Behavioral Approaches to Financial Decision-Making Conference 2022
Featured on (selected): Marginal Revolution, Bloomberg, Quartz, Newswise, FAZ, Wharton on SiriusXM, Berkeley Haas Magazine, Market Watch, The New York Times DealBook, Business Insider, Forbes, NBER Digest, IZA Commentary
We assess the long-term effects of managerial stress on aging and mortality. First, we show that exposure to distress shocks during the Great Recession produces visible signs of aging in CEOs. Applying neural-network based machine-learning techniques to pre- and post-distress pictures, we estimate an increase in their so-called apparent age by one year. Second, using data on CEOs since the 1980s, we estimate a 1.2-year decrease in life expectancy after an industry distress shock, but a two-year increase when anti-takeover laws insulate CEOs from market discipline. The estimated health costs are significant, also relative to other known health risks.
In Too Deep: The Effect of Sunk Costs on Corporate Investment
The Journal of Finance, forthcoming
PDF
Presented at (selected): AFA 2021, Behavioral Economics Annual Meeting (BEAM) 2021, Finance, Markets, and Organizations (FOM) Conference 2021, Berkeley-Stanford Joint Finance Conference Fall 2019, Michigan Ross, U Maryland, UCL, Wharton
Featured on: Knowledge@Wharton
Sunk costs are unrecoverable costs that should not affect decision-making. I provide evidence that firms systematically fail to ignore sunk costs and that this leads to significant investment distortions. In fixed-exchange-ratio stock mergers, aggregate market fluctuations after parties enter into a binding merger agreement induce plausibly exogenous variation in the final acquisition cost. These quasi-random cost shocks strongly predict firms’ commitment to an acquired business following deal completion, with an interquartile cost increase reducing subsequent divestiture rates by 8-9%. Consistent with an intrapersonal sunk cost channel, distortions are concentrated in firm-years in which the acquiring CEO is still in office.
Behavioral Corporate Finance: The Life Cycle of a CEO Career (with U. Malmendier)
Oxford Research Encyclopedia of Economics and Finance, Oxford University Press, September 2020
PDF NBER WP CEPR DP
Featured on: Harvard Law School Forum on Corporate Governance, Wharton on SiriusXM, Knowledge@Wharton, Penn Today
One of the fastest-growing areas of finance research is the study of managerial biases and their implications for firm outcomes. Since the mid-2000s, this strand of behavioral corporate finance has provided theoretical and empirical evidence on the influence of biases in the corporate realm, such as overconfidence, experience effects, and the sunk-cost fallacy. The field has been a leading force in dismantling the argument that traditional economic mechanisms — selection, learning, and market discipline — would suffice to uphold the rational-manager paradigm. Instead, the evidence reveals that behavioral forces exert a significant influence at every stage of a chief executive officer’s (CEO’s) career. First, at the appointment stage, selection does not impede the promotion of behavioral managers. Instead, competitive environments oftentimes promote their advancement, even under value-maximizing selection mechanisms. Second, while at the helm of the company, learning opportunities are limited, since many managerial decisions occur at low frequency, and their causal effects are clouded by self-attribution bias and difficult to disentangle from those of concurrent events. Third, at the dismissal stage, market discipline does not ensure the firing of biased decision-makers as board members themselves are subject to biases in their evaluation of CEOs.
By documenting how biases affect even the most educated and influential decision-makers, such as CEOs, the field has generated important insights into the hard-wiring of biases. Biases do not simply stem from a lack of education, nor are they restricted to low-ability agents. Instead, biases are significant elements of human decision-making at the highest levels of organizations.
An important question for future research is how to limit, in each CEO career phase, the adverse effects of managerial biases. Potential approaches include refining selection mechanisms, designing and implementing corporate repairs, and reshaping corporate governance to account not only for incentive misalignments but also for biased decision-making.
Excess Commitment in R&D (with T. Liu), February 2024
The Review of Financial Studies, R&R
PDF
Presented at (selected conferences only, * by coauthor, ** scheduled): Kentucky Finance Conference 2023, LBS Summer Finance Symposium 2023, ENTFIN Conference 2023, EFA 2023, NFA 2023, HEC Paris Entrepreneurship Workshop, AFA 2024*, MFA 2024*, Texas Finance Festival 2024*, NBER Corporate Finance Spring Meeting 2024, SFS Cavalcade 2024**
We document a form of "excess" commitment to R&D projects and examine the consequences for innovation outcomes and consumer welfare, using detailed data on pharmaceutical firms' clinical trial projects. Plausibly-exogenous delays in the completion of the preceding trial-phase, empirically uncorrelated with various project-quality measures, substantially reduce firms’ subsequent project termination propensity. This excess project commitment intensifies when the CEO has higher stock price–compensation sensitivity and is personally responsible for the project's initiation. Welfare implications are nuanced: delay-driven commitment induces investment crowd-out, while not predicting increased adverse effects in marginally-launched drugs and predicting continuation of drugs for diseases lacking alternative treatments.
Prosociality and Layoffs (with C. Hamilton and U. Malmendier), November 2023 [Email for copy of the manuscript]
Presented at (selected conferences only, * by coauthor, ** scheduled): AFA 2023*, RCFS Winter Conference 2023, Drexel Corporate Governance Conference 2023, Erasmus Corporate Governance Conference 2023, SITE Psychology and Economics, JCF Conference on Ownership and Corporate Social and Sustainable Policies 2023, NBER Behavioral Finance Fall Meeting 2023, Adam Smith Workshop 2024**
Many managers describe layoffs as the hardest and most painful decisions of their careers; yet, standard economic models treat the adjustment of human capital akin to that of physical capital. We study whether prosocial considerations factor into CEOs’ layoff decisions. Using NLP techniques, we construct a new dataset on the extensive and intensive margin of layoffs by U.S. public firms. First, we estimate large adverse health effects of firing on CEOs in the form of accelerated long-run mortality. Distress-induced layoffs predict a decrease in CEOs’ lifespan by 1.85 years. Second, we show that CEOs become more reluctant to make layoffs over their tenure as they form more connections inside the firm. After plausibly-exogenous CEO changes, instead, new CEOs make more and shareholder value-increasing layoff decisions. CEOs’ increasing reluctance to lay off employees is amplified when the timing makes layoffs more painful to employees, such as those during recessions or the holiday season, or when they are painful to witness for the manager as they affect socially or geographically close employees.
What Drives Very Long-Run Cash Flow Expectations? (with P. Decaire), November 2023 [Email for copy of the manuscript]
Presented at (** scheduled): Mid-Atlantic Research Conference in Finance (MARC) 2024**, Behavioral Finance Conference at Bocconi 2024**
Best Paper Award at Mid-Atlantic Research Conference in Finance (MARC) 2024
Expectations of firms’ cash flows far into the future are central to corporate finance and asset pricing. Using a large, novel dataset on professional forecasters’ terminal growth rates (TGR) of firms that includes information about forecaster identities, allowing us to gather detailed personal backgrounds of forecasters, we establish key facts and identify drivers of their (very) long-run cash flow expectations. First, TGR expectations contain distinct economic information relative to other forecasting series, such as IBES long-term growth (LTG) forecasts which capture shorter, 3-5-year forecast horizons. Second, TGR expectations strongly and robustly predict realized long-run firm growth. Third, consistent with firm life cycle models, TGR expectations decline with firm age. Fourth, with the exception of very mature firms where a firm’s country and industry primarily account for the variation in TGRs, there exists large, persistent heterogeneity in TGR expectations across forecasters. Finally, compared to other settings (e.g., Giglio et al., 2021), forecaster demographics and backgrounds explain a larger part of the persistent heterogeneity in TGR expectations.
Longevity and Occupational Choice (with U. Malmendier and D. Sosyura), October 2023 [Email for copy of the manuscript]
Presented at: NBER Health Economics Fall Meeting 2023, Ageing and Sustainable Finance Conference 2024**, ABFER Conference (Household Finance) 2024**, CEPR Economics of Longevity and Ageing Conference 2024**