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The Origins and Real Effects of the Gender Gap: Evidence from CEOs' Formative Years (with Ran Duchin, Mike Simutin)

Review of Financial Studies, 34 (2), February 2021, 700-762

Abstract: Using individual census records, we provide novel evidence on CEOs' socioeconomic backgrounds and study their role in investment decisions. Male CEOs allocate more investment capital to male than female division managers. This gender gap is driven by CEOs who grew up in male-dominated families where the father was the only income earner and had more education than the mother. The gender gap also increases for CEOs who attended all-male high schools and grew up in neighborhoods with greater gender inequality. The effect of gender on capital budgeting introduces frictions and erodes investment efficiency.


Family Descent as a Signal of Managerial Quality: Evidence from Mutual Funds (with Oleg Chuprinin)

Review of Financial Studies, 31 (10), October 2018, 3756-3820

Abstract: Using data from individual Census records on the wealth of managers' parents, we find that mutual fund managers from poor families outperform managers from rich families. We argue that managers born poor face higher entry barriers into asset management. Consistent with this view, managers born poor are promoted only if they outperform while those born rich are more likely to be promoted for reasons unrelated to performance. Overall, we establish a first link between fund managers’ family descent and their ability to create value.


Spillovers inside Conglomerates: Incentives and Capital (with Ran Duchin and Amir Goldberg)

Review of Financial Studies, 30 (5), May 2017, 1696-1743

Abstract: Using hand-collected data on divisional managers at conglomerates, we find that a change in industry surplus in one division generates spillovers on managerial payoffs in other divisions of the same firm. These spillovers arise only within the boundaries of a conglomerate. The intra-firm spillovers increase when conglomerates have excess cash and when managers have more influence over its distribution, but decline in the presence of strong governance. These spillovers are associated with weaker performance and lower firm value. Our evidence is consistent with simultaneous cross-subsidization via managerial payoffs and capital budgets and suggests that these practices arise in similar firms.


Clouded Judgment: The Role of Sentiment in Credit Origination (with Kristle Cortes and Ran Duchin)

Journal of Financial Economics, 121 (2), August 2016, 392-413

Abstract: Using daily fluctuations in local sunshine as an instrument for sentiment, we study its effect on day-to-day decisions of lower-level financial officers. Positive sentiment is associated with higher credit approvals, and negative sentiment has the opposite effect of a larger magnitude. These effects are stronger when financial decisions require more discretion, when reviews are less automated, and when capital constraints are less binding. The variation in approval rates affects ex-post financial performance and produces significant real effects. Our analysis of the economic channels suggests that sentiment influences managers' risk tolerance and subjective judgment.


Rumor Has It: Sensationalism in Financial Media (with Kenneth Ahern)

Review of Financial Studies, 28 (7), July 2015, 2050-2093

Abstract:The media has an incentive to publish sensational news.  We study how this incentive affects the accuracy of media coverage in the context of merger rumors.  Using a novel dataset, we find that accuracy is predicted by a journalist's experience, specialized education, and industry expertise.  Conversely, less accurate stories use ambiguous language and feature well-known firms with broad readership appeal.  Investors do not fully account for the predictive power of these characteristics, leading to an initial target price overreaction and a subsequent reversal, consistent with limited attention.  Overall, we provide novel evidence on the determinants of media accuracy and its effect on asset prices.

Safer Ratios, Riskier Portfolios: Banks' Response to Government Aid (with Ran Duchin)

Journal of Financial Economics, 113 (1), July 2014, 1-28 (Lead Article)

Abstract: We study the effect of government assistance on bank risk taking. Using hand-collected data on bank applications for government investment funds, we investigate the effect of both application approvals and denials. To distinguish banks' risk taking behavior from changes in economic conditions, we control for the volume and quality of credit demand based on micro-level data on home mortgages and corporate loans. Our difference-indifference analysis indicates that banks make riskier loans and shift investment portfolios toward riskier securities after being approved for government assistance. However, this shift in risk occurs mostly within the same asset class and, therefore, remains undetected by the closely-monitored capitalization levels, which indicate an improved capital position at approved banks. Consequently, these banks appear safer according to regulatory ratios, but show a significant increase in measures of volatility and default risk.


Winners in the Spotlight: Media Coverage of Fund Holdings as a Driver of Flows
(with David Solomon and Eugene Soltes)

Journal of Financial Economics, 113 (1), July 2014, 53-72

Abstract: We show that media coverage of mutual fund holdings affects how investors allocate money across funds. Fund holdings with high past returns attract extra flows, but only if these stocks were recently featured in the media. In contrast, holdings that were not covered in major newspapers do not affect flows. We present evidence that media coverage tends to contribute to investors' chasing of past returns rather than facilitate the processing of useful information in fund portfolios. Our evidence suggests that media coverage can exacerbate investor biases and that it is the primary mechanism that makes window dressing effective.


Who Writes the News? Corporate Press Releases During Merger Negotiations (with Kenneth Ahern)

Journal of Finance, 69 (1), February 2014, 241-291

Abstract: Firms have an incentive to manage media coverage to influence their stock price during important corporate events. Using comprehensive data on media coverage and merger negotiations, we find that bidders in stock mergers originate substantially more news stories after the start of merger negotiations, but before the public announcement. This strategy generates a short-lived run-up in bidders' stock prices during the period when the stock exchange ratio is determined, which substantially impacts the takeover price. Our results demonstrate that the timing and content of financial media coverage may be biased by firms seeking to manipulate their stock price. 


Divisional Managers and Internal Capital Markets (with Ran Duchin)

Journal of Finance, 68 (2), April 2013, 387-429 (Lead Article)

Abstract: Using hand-collected data on divisional managers at S&P 500 firms, we study their role in internal capital budgeting. Divisional managers with social connections to the CEO receive more capital. Connections to the CEO outweigh measures of managers' formal influence, such as seniority and board membership, and affect both managerial appointments and capital allocations. The effect of connections on investment efficiency depends on the tradeoff between agency and information asymmetry. Under weak governance, connections reduce investment efficiency and firm value via favoritism. Under high information asymmetry, connections increase efficiency and value via information transfer.


The Politics of Government Investment (with Ran Duchin)

Journal of Financial Economics, 106 (1), October 2012, 24-48

Abstract: This paper investigates the relation between corporate political connections and government investment. We study various forms of political influence, ranging from passive connections between firms and politicians, such as those based on politicians' voting districts, to active forms, such as lobbying, campaign contributions, and employment of connected directors. Using hand-collected data on firm applications for capital under the Troubled Asset Relief Program (TARP), we find that politically connected firms are more likely to be funded, controlling for other characteristics. Yet investments in politically connected firms underperform those in unconnected firms. Overall, we show that connections between firms and regulators are associated with distortions in investment efficiency.


Working Papers

Irreplaceable Venture Capitalists (with Michael Ewens)

Abstract: We provide causal evidence on how individual venture capitalists (VCs) add value to startups, using exogenous deaths of VC directors on startup boards. Losing a VC director increases the probability of startup failure, delays a successful exit, and reduces the IPO likelihood. Affected startups that raise capital after a director loss obtain a narrower investor base. These effects persist after the replacement of deceased VCs, indicating the importance of the original deal experts for startup survival, financing, and going public. In contrast, losing a VC director does not affect recruitment, product development, and CEO replacement, suggesting that these skills are replicable. Overall, a VC's network and reputation are key irreplaceable assets.

On a Spending Spree: The Real Effects of Heuristics in Managerial Budgets (with Paul Decaire)

Abstract: Using micro data on managerial expenditures, we uncover heuristics in capital budgets, such as nominal rigidity, anchoring, and sharp reset deadlines. Such heuristics engender managerial opportunism and erode investment efficiency. Managers with a budget surplus increase investment sharply before budget deadlines, and such investments yield lower sales, weaker margins, and more negative NPV projects. Managers who reach a budget constraint early in the fiscal cycle halt further spending until their budget is reset, irrespective of investment options. These effects are stronger at firms with more hierarchical layers and a greater subordinates-to-executives ratio. Overall, simplifying budgeting rules engender strategic behavior and wasteful spending.

Self-Dealing in Corporate Investment (with Paul Decaire)

Abstract: Using hand-collected data on CEOs' personal assets, we find that CEOs prioritize corporate investment projects that increase the value of CEOs' private assets. Such projects are implemented sooner, receive more capital, and are less likely to be dropped. This investment strategy delivers large personal gains to the CEO but selects lower NPV projects for the firm and erodes its investment efficiency. CEO self-dealing is driven by public firms and disappears at smaller private firms where the agent is the principal. Departures of self-dealing CEOs increase firm value by 5–7%. Overall, we uncover CEOs' private gains in capital budgeting.

Remotely Productive: The Efficacy of Remote Work for Executives (with Ran Duchin)

Abstract: We study the efficacy of remote working arrangements between CEOs and firms. Long-distance CEOs underperform according to operating performance, firm valuation, insider reviews, and announcement returns to CEO departures. These effects are stronger when the CEO lives further away and crosses multiple time zones. Using the private costs from uprooting the CEO's spouse as an instrument for the CEO's decision to work remotely, we verify the robustness of performance outcomes. The underperformance of long-distance CEOs is related to short-termism, loss of information, and consumption of leisure, such as recreational boats and beach homes.

Media as a Money Doctor: Evidence from Refinancing Decisions (with Lin Hu, Kun Li, and Phong Ngo)

Abstract: We argue that business TV helps households avoid costly mistakes in mortgage refinancing. We use three sources of variation in TV exposure: (1) staggered entry of business networks into zip codes, (2) channels' ordinal positions in the cable lineup, and (3) channel regroupings from system upgrades that alter their salience to the viewer. Exposure to business TV is associated with a higher refinancing propensity, faster response, and fewer incomplete applications. These behaviors generate large economic savings. The effects are driven by general-audience networks—Fox Business and CNBC—and do not arise for the professionally oriented Bloomberg TV.

Banking Deregulation and Stock Market Participation (with Serhiy Kozak)

Abstract: We exploit staggered removals of interstate banking restrictions to identify the causal effect of access to credit on households' stock market participation and asset allocation. Using micro data on retail brokerage accounts and proprietary data on personal credit histories, we document two effects of the loosening of credit constraints on households' financial decisions. First, households enter the stock market by opening new brokerage accounts. Second, households increase their asset allocation to risky assets and reduce their allocation to cash, consistent with a lower need for precautionary savings. The effects are stronger for younger and more credit constrained investors. Overall, we establish one of the first direct links between access to credit and households' investment decisions.


Winners and Losers of Financial Crises: Evidence from Individuals and Firms
(with Daniela Hochfellner, Joshua Montes, and Martin Schmalz)

Abstract: Using a comprehensive employer-employee dataset from German social security records, we examine the impact of an exogenous shock to bank capital on individual workers' careers. We find that German regional banks' trading losses from U.S. mortgage-backed securities cause a large contraction in the supply of capital to private firms in banks' exclusive geographic domains. Workers in affected firms experience persistent earnings losses of approximately 1,000 euros per year, nine weeks longer unemployment spells, and a lower probability of climbing the job ladder than workers in unaffected firms.


Arizona State University