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Table of Contents

Looking in the Rear View Mirror: The Effect of Managers’ Professional Experience on Corporate Cash Holdings

Amy K. Dittmar, University of Michigan at Ann Arbor - Stephen M. Ross School of Business
Ran Duchin, University of Washington - Michael G. Foster School of Business

Beyond Economics: Behavioral Dynamics in Pay for Performance

Tamara Belinfanti, New York Law School

CEO Overconfidence, CEO Compensation, and Earnings Manipulation

Chia-Feng Yu, University of Adelaide

Managerial Overconfidence and Cost Stickiness

Clara Xiaoling Chen, University of Illinois at Urbana-Champaign - Department of Accountancy
Timo Gores, University of Cologne
Julia Nasev, University of Cologne

The Causes and Cures of Unethical Business Practices – A Jewish Perspective

Steven H. Resnicoff, DePaul University College of Law

CORPORATE GOVERNANCE & SOCIOLOGY OR PSYCHOLOGY eJOURNAL
Sponsored by IRRC Institute

"Looking in the Rear View Mirror: The Effect of Managers’ Professional Experience on Corporate Cash Holdings" Free Download

AMY K. DITTMAR, University of Michigan at Ann Arbor - Stephen M. Ross School of Business
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RAN DUCHIN, University of Washington - Michael G. Foster School of Business
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This paper examines how CEOs’ prior work experiences affect firms’ financial policies. Using employment data on more than 8,500 CEOs, we study the effect of being previously employed at a firm that faced financial difficulties on the decision to hold more cash. Our identification strategy exploits exogenous CEO turnovers and past employment in other firms and in roles other than the CEO. We find that firms run by CEOs who experienced financial difficulties are more conservative and hold substantially more cash. The results are stronger in poorly governed firms and are associated with a lower marginal value of cash. We find similar, yet weaker effects for CFOs.

"Beyond Economics: Behavioral Dynamics in Pay for Performance" Free Download
Hofstra Law Review, Forthcoming
NYLS Legal Studies Research Paper No. 12/13 #50
NYLS Clinical Research Institute Paper No. 26/2013

TAMARA BELINFANTI, New York Law School
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This article argues that while much of the intellectual energy has focused on the economics of executive pay, the challenge of executive compensation is as much a challenge of human behavior as it is one of economics. The raison d’etre of pay for performance (PFP) is to motivate executives to make decisions that are in the best interest of their firm and its shareholders. Attention to the relevant individual, situational, cultural, and institutional dynamics (what I term “behavioral dynamics�) that affect how executives are motivated and how they value future rewards is critical for the sustainability of PFP as a model of compensation design.

Drawing on salient research in the cognitive science and decision-making literature, the article invites consideration on how relevant behavioral dynamics could affect our assessment of PFP as a motivational tool. The article concludes by suggesting five potential ways to incorporate behavioral dynamics into compensation policy and design.

"CEO Overconfidence, CEO Compensation, and Earnings Manipulation" Free Download
25th Australasian Finance and Banking Conference 2012

CHIA-FENG YU, University of Adelaide
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In recent heated financial debates, chief executive officers (CEOs) are blamed for their overconfidence leading to earnings manipulation and excessive risk. How is it then that these overconfident CEOs obtain job offers in the first place? In an agency model with CEO overconfidence and public regulation, this paper finds conditions under which it is ex ante firm-value-maximizing to deliberately select ('side-bet') with an overconfident CEO and accommodate earnings manipulation. It is then shown that earnings manipulation and having an overconfident CEO in control can enhance the interim market valuation of the firm, provided certain conditions are satisfied. These results indicate the potential bright side of earnings manipulation and CEO overconfidence, and provide an explanation for why earnings manipulation and CEO overconfidence can remain even under firm-value-maximizing corporate governance. For policy implication, this paper shows that it is socially optimal for a regulatory body to impose a lenient policy on earnings manipulation rather than a zero-tolerance policy. This result suggests that the co-existence of earnings manipulation and CEO overconfidence is a result of a tripartite interaction among overconfident CEOs, boards deliberately selecting an overconfident CEO, and a regulatory body with leniency towards earnings manipulation. The dark side of 'side-betting' and leniency towards earnings manipulation, however, is that the firm bears greater risk and is more likely to go bankrupt ex post.

"Managerial Overconfidence and Cost Stickiness" Free Download

CLARA XIAOLING CHEN, University of Illinois at Urbana-Champaign - Department of Accountancy
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TIMO GORES, University of Cologne
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JULIA NASEV, University of Cologne
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We propose managerial overconfidence as a behavioral explanation for SG&A cost stickiness. Building on the psychology literature, we predict that overconfident managers are more likely to overestimate future demand and therefore less likely to cut SG&A costs when sales decline. Using a sample of 14,568 S&P 1500 firm-years between 1992 and 2011, we document that SG&A cost stickiness increases in the degree of CEO overconfidence. We address key alternative explanations and document that our results are robust to different measures of managerial overconfidence and different model specifications. By focusing on a managerial characteristic, our results provide strong support for the role of managerial discretion in cost management.

"The Causes and Cures of Unethical Business Practices – A Jewish Perspective" Free Download

STEVEN H. RESNICOFF, DePaul University College of Law
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The workplace seems increasingly characterized by unethical practices between and among employers, employees, customers, competitors and others, despite the fact that most leading religious traditions proscribe such conduct and many of the actors self-identify as religious. This paper examines this phenomenon through the prism of Jewish tradition. It identifies specific Jewish teachings that explain many types of misconduct and, where appropriate, it cites modern secular experiments that confirm these Judaic insights. Based on these teachings, the paper prescribes a series of steps that, if implemented, could enhance the integrity of business and financial actors. This is a working paper in connection with the Henry Kaufman Forum on Religious Traditions and Business Behavior sponsored by the Robert H. Smith School of Business at the University of Maryland.

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Corporate Governance & Sociology or Psychology eJournal

PATRICK BOLTON
Barbara and David Zalaznick Professor of Business, Columbia Business School - Department of Economics, Fellow, Centre for Economic Policy Research (CEPR), National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

BRIAN R. CHEFFINS
S.J. Berwin Professor of Corporate Law, University of Cambridge - Faculty of Law, Fellow, European Corporate Governance Institute (ECGI)

JOHN C. COFFEE
Adolf A. Berle Professor of Law and Director of the Center on Corporate Governance, Columbia Law School, Fellow, European Corporate Governance Institute (ECGI), Fellow, American Academy of Arts & Sciences

JULIAN R. FRANKS
Professor of Finance, London Business School, Fellow, Centre for Economic Policy Research (CEPR), Fellow, European Corporate Governance Institute (ECGI)

HENRY HANSMANN
Augustus E. Lines Professor of Law, Yale Law School, Fellow, European Corporate Governance Institute (ECGI)

OLIVER D. HART
Andrew E. Furer Professor of Economics, Harvard University - Department of Economics, National Bureau of Economic Research (NBER)

BENGT R. HOLMSTRÖM
Paul A. Samuelson Professor of Economics, Massachusetts Institute of Technology (MIT) - Department of Economics, National Bureau of Economic Research (NBER), European Corporate Governance Institute (ECGI)

KLAUS J. HOPT
Director (em.), Max Planck Institute for Comparative and International Private Law, European Corporate Governance Institute (ECGI)

MICHAEL C. JENSEN
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HIDEKI KANDA
Professor of Law, University of Tokyo - Graduate School of Law and Politics

STEVEN NEIL KAPLAN
Neubauer Family Professor of Entrepreneurship and Finance, University of Chicago - Booth School of Business, National Bureau of Economic Research (NBER)

RAKESH KHURANA
Marvin Bower Professor of Leadership Development, Harvard Business School

DAVID F. LARCKER
James Irvin Miller Professor of Accounting, Stanford University - Graduate School of Business

CHRISTIAN LEUZ
J. Sondheimer Professor of International Economics, Finance and Accounting, University of Chicago - Booth School of Business, Research Associate, National Bureau of Economic Research (NBER), Research Associate, European Corporate Governance Institute (ECGI), Fellow, Center for Financial Studies (CFS), Fellow, University of Pennsylvania - Wharton Financial Institutions Center, Fellow, CESifo Research Network

MARCO PAGANO
Professor of Economics, University of Naples Federico II - Department of Economics, Fellow, Centre for Economic Policy Research (CEPR), Fellow, European Corporate Governance Institute (ECGI)

RAGHURAM G. RAJAN
Eric J. Gleacher Distinguished Service Professor of Finance, University of Chicago - Booth School of Business, International Monetary Fund (IMF), National Bureau of Economic Research (NBER)

ROBERTA ROMANO
Sterling Professor of Law and Director, Yale Law School Center for the Study of Corporate Law, Yale Law School, Research Associate, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

ANDREI SHLEIFER
Professor of Economics, Harvard University - Department of Economics, Fellow, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

LAURA T. STARKS
Charles E. and Sarah M. Seay Regents Chair in Finance, University of Texas at Austin - Department of Finance

RENE M. STULZ
Everett D. Reese Chair of Banking and Monetary Economics, Ohio State University (OSU) - Department of Finance, National Bureau of Economic Research (NBER), Fellow, European Corporate Governance Institute (ECGI)

JEAN TIROLE
Scientific Director, University of Toulouse 1 - Industrial Economic Institute (IDEI), University of Toulouse 1 - Groupe de Recherche en Economie Mathématique et Quantitative (GREMAQ), Fellow, Centre for Economic Policy Research (CEPR)

LUIGI ZINGALES
Robert C. McCormack Professor of Entrepreneurship and Finance and David G. Booth Faculty Fellow, University of Chicago Booth School of Business, National Bureau of Economic Research (NBER), Fellow, Centre for Economic Policy Research (CEPR), University of Chicago - Polsky Center for Entrepreneurship, Fellow, European Corporate Governance Institute (ECGI)

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