Revisiting Managerial 'Style': The Replicability and Falsifiability of Manager Fixed Effects for Firm Policies

Abstract

A growing literature studies the importance of top managers for firm policies and performance. We revisit the foundations of this literature by replicating and extending the analysis of Bertrand and Schoar (2003), who used manager fixed effects to provide evidence for the existence of managerial “style” in the form of financial statement metrics like leverage, R&D spending, and Tobin’s Q. We find that the statistical and economic significance of manager fixed effects is notably lower in our results than in theirs, although sometimes we obtain stronger results. There is no obvious pattern to the discrepancies. These discrepant findings motivated us to conduct placebo tests using data in which we randomize managers’ spells at their firms. The results with the randomized data are effectively indistinguishable from those with the real data, suggesting (a) that the apparent explanatory power of manager fixed effects is a statistical artifact and (b) that managerial “style” may manifest itself in more complex ways than can be ascertained from examining financial statement metrics.

Keywords: top management, firm policy, governance, panel-data methods, replication

JEL Classification: D70, M12