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THE
QUARTERLY
JOURNAL
ECONOMICS
OF
Vol CXVIII
Issue 4
November 2003
MANAGING WITH STYLE: THE EFFECT OF MANAGERS
ON FIRM POLICIES*
Marianne
Bertrand
This
whether
paper
investigates
and performance.
We
behavior
rate
set which
We
A
enables
us
tional
practices
cate
general
sation
are more
and
findings
from earlier
on the other
more
hand,
aggressive
individual
a manager-firm
affect
managers
matched
panel
firms over
corpo
data
the
effects
in managerial
"style"
managers.
to indi
appear
we
show
that
that
decision-making
across
Moreover,
fixed effects
to manager
in performance
related
receive higher
fixed effects
compen
performance
to be found in better
In a final step, we
firms.
governed
likely
to observable
these
executives
how
construct
is significantly
with higher
management
style
and that managers
tie back
fixed
patterns
specific
in
differences
identify
and
Schoar
across
time.
different
top managers
matter
for a wide
decisions.
range of corporate
of the heterogeneity
in investment,
and organiza
financial,
can be explained
of firms
of manager
fixed effects.
by the presence
to track
find that manager
extent
significant
We
and Antoinette
birth
who
managers
We
characteristics.
managerial
on average
appear
hold an MBA
degree
cohorts
find
that
to be more
seem
conservative;
to follow on average
strategies.
I. Introduction
"In the
bank.
old days
Garbage?it's
I would
have
about
the
said
guy
it was
at
the
capital,
top.
history,
I am very
the name
much
of the
a process
*
We
the editors
thank
and Edward
Katz
three anony
(Lawrence
Glaeser),
Kent Daniel,
Kevin
J. Mur
Rebecca
Steven
referees,
Henderson,
Kaplan,
Sendhil
Canice
David
Mullainathan,
phy,
Scharfstein,
Prendergast,
Jerry
Michael
at Harvard
seminar
the
Warner,
Weisbach,
participants
University,
of Management
Graduate
School
at Northwestern
the Mas
Kellogg
University,
Institute
of Technology,
the University
of Chicago
sachusetts
School
Graduate
of
the University
at Urbana-Champaign,
of Illinois
Rochester
Business,
University,
and the Stockholm
School
of Economics
for many
comments.
We
thank
helpful
us with
Kevin
J. Murphy
and Robert
Parrino
for generously
their data.
providing
Jennifer
Fiumara
and Michael
McDonald
assistance.
excellent
research
provided
E-mail:
aschoar@mit.edu.
marianne.bertrand@gsb.uchicago.edu;
mous
? 2003 by the President
and Fellows
Technology.
The Quarterly Journal
of Economics,
of Harvard
College
November
2003
1169
and the Massachusetts
Institute
of
QUARTERLY JOURNAL OF ECONOMICS
1170
person,
a builder.
Sandy
is an acquirer.
[Weil]
Just
totally
different."
?John
Reed, CEO Citicorp
matter
How much do individual managers
for firm behavior
so
in finance and economics
and economic performance?
Research
em
to this question.1
far has given
little consideration
Existing
or market-level
studies
pirical
rely on firm-, industry-,
typically
to explain
characteristics
behavior
and performance
corporate
but
role that individual managers
may
largely ignore the possible
in
outcomes.
in the
these
view
Yet, a prevailing
play
shaping
business
themselves
(as the quote by
press and among managers
John Reed at the beginning
of the paper suggests)
is that CEOs
are
in
of
and other top executives
the determination
key factors
as
are
often perceived
their
corporate practices. Managers
having
own
and other stra
investment,
financing,
"styles" when making
on the
their personal marks
decisions,
thereby
imprinting
of this paper is
The novel contribution
companies
they manage.2
in an
to explicitly
dimension
introduce
such a people, or manager,
tegic
study of corporate
empirical
practices.3
The relevance
of this approach
is further
underlined
when
we
in corporate practices
that is left
models
that rely only on firm- and
on the cross-sec
research
example,
the large heterogeneity
by more standard
unexplained
consider
factors. For
industry-level
of capital
structure
and Wes
tional determinants
(e.g., Titman
and
and Watts
and
sels [1988], Smith
Jarrell,
[1992],
Bradley,
a
amount
Kim
shows
variation
remains
of
that
[1984])
large
for firm-level
characteristics
after controlling
(such
unexplained
or
a firm operates
as market-to-book
assets
the
of
ratios,
type
are papers
in the theory
1. A few recent
literature
by Rotemberg
exceptions
the
and Saloner
model
[2002]. These
[2000] and Van den Steen
papers
explicitly
of firm policy.
determinant
vision
of the CEO as an important
an article
in a May
issue of Business
2. To mention
2001
just one example,
discusses
the aggressive
titled
"The Koszlowski
Week,
Method,"
acquisition
style
of Dennis
the CEO of Tyco.
Koszlowski,
in shaping
has been virtu
3. While
the role of managers
corporate
practices
in the economics
there is a large body of work
and finance
literature,
ally ignored
the determinants
of decision
in the management
literature
science
analyzing
and Mason
Hambrick
[1984] or Waldman,
among CEOs
(see, for example,
making
focus of this litera
and Puranam
[2001]). Yet, both the specific
Ramirez,
House,
it follows
from the
ture and the methodological
differ
substantially
approach
in
to undertake
variables
considered
the outcome
here. First,
study we propose
are mostly
variables
literature
the management
(e.g., communi
process-related
we care
or charisma)
outcomes
economic
rather
than the actual
cation
process
on
science
in management
relies
most
of the existing
work
about here.
Second,
or subjective
case studies,
therefore
survey
responses,
experiments,
laboratory
an empirical
A paper
that follows
of our approach.
the level of generality
lacking
more
to ours is Lieberman,
and Williams
related
[1990],
Lau,
closely
approach
in the U. S. and Japa
in productivity
fixed effects
who find significant
manager
nese automobile
industry.
1171
MANAGING WITH STYLE
or industry fixed effects.4
tax shields)
In a similar vein,
in investment
to cash flow
the ongoing debate about differences
to Q sensitivities
and Pe
and investment
[Fazzari, Hubbard,
tersen
and Zingales
the consider
1997] highlights
1988; Kaplan
as to the roots of the wide variation
in invest
able disagreement
across firms. One primary
ment behavior
this
of
paper is
objective
nondebt
to ask whether
managers'
or market
factors,
dustry,
as opposed
to firm, in
account
for these unex
personalities,
can in part
differences.
we want
Intuitively,
plained
to quantify
how much
of the observed
can
to
fixed
attributed
be
manager
policies
with
other
effects.
Since manager
effects might
be correlated
we estimate
in
the role of managers
characteristics,
firm-specific
a framework
we
can
and unobserv
control for observable
where
we construct
a
across firms. For this purpose,
able differences
we
matched
track individual
manager-firm
panel data set, where
in firm
variation
across different
firms
top managers
estimate
how much
of the unexplained
can be attributed
to manager
fixed
time. This allows us to
in firm practices
variation
over
after controlling
for
effects,
firm characteristics.5
time-varying
we study relate
to invest
variables
The specific
corporate
to
ment
investment
Q
sensitivity,
policy
(capital expenditures,
firm fixed
effects
and
to cash flow sensitivity,
and acquisition
investment
policy), finan
interest
cash
cial policy
(financial
coverage,
holdings,
leverage,
and dividend
(R&D expendi
strategy
organizational
payouts),
diversification
tures, advertising
policy, and cost
expenditures,
and
cutting policy),
performance.6
fixed effects are empirically
Our results
show that manager
variables.
determinants
of a wide
range of corporate
important
to
models
of
On average,
the
fixed
effects
prac
corporate
adding
firm
account
for observable
and unobservable
tices that already
more
in
in
increases
of
than
characteristics
results
i?2's
adjusted
we find that manager
four percentage
interestingly,
points. More
4. For
Phillips
a recent
[2002].
study
of intraindustry
variation
in leverage,
see MacKay
and
to firm performance
5. A few recent papers
relate managerial
characteristics
investment.
and T?te
Malmendier
[2002] and Wasserman,
See, for example,
for firm fixed
these papers
do not control
and Anand
[2002]. However,
Nohria,
from firm effects.
In a more
and therefore
effects
cannot
effects
manager
separate
more
to ours.
recent paper Malmendier
similar
and T?te
[2003] use a methodology
across firms to study the effect of managerial
overconfidence
track switchers
They
on acquisition
behavior.
to measure
used
in this analysis
6. The
intends
fixed
effects
approach
there
is persistence
of managerial
different
whether
style over time and across
in this paper. But we do not want
is the very definition
of "style" used
jobs. This
to rule out that managers
their style over time.
learn or develop
may
and
QUARTERLY JOURNAL OF ECONOMICS
1172
effects
matter
much
and
more
for some
decisions
than
others.
Man
in acquisition
appear to be especially
important
interest
dividend
coverage,
decisions,
policy,
ager fixed effects
or diversification
policy.
these
cost-cutting
estimated
fixed effects across
manager
we are also able to identify
some
variables,
in managerial
patterns
decision-making.
Among
we find that managers
seem to differ in their ap
By correlating
different
corporate
overarching
other things,
proach toward
ness. Managers
diversification
company growth and in their financial
aggressive
and
who engage
in more
external
acquisitions
lower levels of capital
display
expenditures
also find that managers
who have high investment
to cash flow
effects
rank lower in their investment
also
and R&D. We
to Q fixed
that managers
(and vice versa),
may differ,
sensitivity
suggesting
in the benchmark
all else equal,
that they use when making
investment
decisions.
that top executives
These
results provide
evidence
vary con
in their management
"styles" and thereby
siderably
finance
research.
for corporate
rather novel approach
as to why managers
also raise questions
may behave
a
suggest
Yet, they
so differ
in apparently
economic
environments.
Do these
similar
or
in
relative
absolute
reflect
differences
findings
preferences,
are
or
the
what
More
skills,
efficiency
importantly,
opinions?
these questions
outline clear
of these findings? While
implications
ently
some preliminary
evidence
for future work, we provide
in
issues. First, we show that the differences
re
are
documented
above
systematically
managerial
practices
we show that
in performance.
More precisely,
lated to differences
directions
on some
of these
are significant
and
fixed effects in performance
managerial
related to some of the fixed effects in
effects are statistically
who are more
invest
For example, managers
corporate practices.
there
these
and have higher administrative
sensitive,
ment-Q
are less active in the acquisition
and diversification
In addition,
fixed effects.
have
lower performance
effects
expenses,
markets
we show
also
and
also
that
receive
with
fixed
higher
performance
and that these managers
higher
salary and total compensation
are more
firms. These results
likely to be found in better governed
are suggestive
of our
of possibly
important
efficiency
implications
managers
findings.
In a final
managerial
are birth
in style
step, we tie back differences
The two characteristics
characteristics.
We analyze
cohort and MBA graduation.
to observable
we consider
the extent
to
1173
MANAGING WITH STYLE
are affected
decisions
corporate
by these two characteris
across firms and
for any fixed differences
tics, after controlling
firm factors. We find that older generations
other time-varying
of
in their decision-making.
CEOs appear overall more conservative
which
who hold an MBA degree
appear
hand, managers
more
to
overall
follow
aggressive
strategies.
as follows.
The rest of this paper
II
is organized
Section
a brief discussion
as to why
of alternative
provides
hypotheses
On
the other
individual
III presents
of the data
for corporate decisions.
Section
may matter
managers
the different
data sources, describes
the construction
the main variables
of interest. Section
set, and defines
IV quantifies
the importance
of manager
fixed effects for various
and
V
Section
discusses
corporate
practices,
efficiency
possible
of these findings.
Section VI studies birth cohort and
implications
as two specific
MBA
determinants
of managerial
graduation
style.
Section
VII
summarizes
and
offers
some
concluding
remarks.
II. Why
Should
Individual
Managers
Matter?
as
of corporate
decisions
implicitly
are
view of the firm in which
top managers
into the production
and selfless
process.
homogeneous
inputs
are regarded
Under
this quite narrow view, different managers
as perfect
extreme
for one another.
An even more
substitutes
Many
empirical
sume a neoclassical
studies
for what
is
simply do not matter
executives
in
differ
their
might
or skill levels, none of this translates
risk-aversion
preferences,
into actual
cannot
if a single person
corporate
policies,
easily
we would
affect these policies. Under
either of these scenarios,
not expect individual managers
to matter
for corporate decisions.
Two firms sharing
similar technologies,
factor, and product mar
is that top managers
assumption
on
a firm. While
within
going
ket
conditions will make
similar choices,
team.
the same management
whether
or not
they also
share
In contrast,
standard
that man
agency models
acknowledge
have
discretion
inside
their
which
agers may
firm,
they can use to
own
alter corporate
and advance
their
How
decisions
objectives.
do not generally
ever, these models
imply that corporate behavior
as they typically do not focus
will vary with
individual managers,
on idiosyncratic
across managers.
differences
Rather,
agency
models
attribute
variations
in corporate
to heterogene
behavior
QUARTERLY JOURNAL OF ECONOMICS
1174
across firms,
of governance
mechanisms
i.e.,
ity in the strength
to
in firms' ability
control managers.7
heterogeneity
across managers
in corporate
will
practices
Heterogeneity
to differ in their
arise in models
allow managers
that explicitly
risk aversion,
skill levels, or opinions. But there are
preferences,
as to how these managerial
two distinct
differ
interpretations
ences translate
into corporate
choices. The first are extensions
of
a manager
can impose his
in which
the standard
agency models
or her own idiosyncratic
if corporate
control
style on a company,
or limited. Under
this view, one might
that the
expect
as
sources
to
increase
of
of
the
internal
and
managers
impact
some
if
controls weaken.
external
management
Alternatively,
than others, better gov
styles are more performance-enhancing
is poor
erned
firms
may
be more
likely
styles.
A second
to select
managers
set of models
that imply manager-specific
are
of the neoclassical
extensions
practices
with
such
effects
in
in
model
In
in their match
with
firms.
this
quality
style on the firm
impose their idiosyncratic
corporate
which managers
vary
do not
case, managers
chosen by firms because of these
they lead, but are purposefully
a board may determine
For example,
the need
specific attributes.
an
to go through
external
growth phase and therefore hire a new
or more
to engage
in
is more
who
manager
prone
aggressive
and given
the
Under
this interpretation
strategies.8
we develop
framework
below, we would
only find sig
empirical
in corporate
if firms' optimal
nificant manager
effects
practices
a
over
time.
if
Indeed,
strategies
given
change
company's
optimal
expansion
over
invariant
strategy were
be
the
continuation
would
only
two main
variants
These
time, an incoming manager's
style
of the prior manager's
style.
view of
of the "managers matter"
have very different
decisions
corporate
efficiency
implications.
some managerial
traits or prefer
Under
the first interpretation,
ences may cause corporations
to adopt suboptimal
The
strategies.
to
extent
to which
this occurs will be limited by boards' ability
a process
is Hermalin
and Weisbach
[1998], who model
by
exception
can gain more
to
which
in turn allows
them
discretion,
good managers
concern
career
models
their
firm.
the
within
Also,
governance
relationship
change
and owners
show that the intensity
between
of the conflict
of interest
managers
may vary over the life cycle of managers.
one could argue
that boards
8. Alternatively,
get fooled and
systematically
on the manager's
A
infer a manager's
prior job experience.
mistakenly
style based
in her or his prior
in a wave
of acquisitions
be involved
may
manager
by chance
as an "acquisition
influence
be wrongly
may
firm, which
style" and
perceived
in
in more
view
detail
this alternative
future
hiring
by other firms. We discuss
IV. C.
subsection
7. One
which
MANAGING WITH STYLE
1175
screen or monitor
Under
the second
managers.
interpretation,
as
in style will not lead to inefficiencies
differences
managerial
select the right manager
for the right
long as boards optimally
under
either
individual
managers
interpretation,
job. However,
are central
in bringing
in corporate
about the changes
policies.
our primary
is not to distinguish
While
goal in this paper
these different
but rather to first estab
interpretations
in the determination
of
do matter
lish that individual managers
we will provide
some preliminary
firm policies,
evidence
about
in Section V.
of our findings
possible
efficiency
implications
between
III. Data
III.A.
Sample
Construction
A straightforward
way to proceed when
trying to determine
in the way top manag
whether
there are systematic
differences
ers behave would be to ask whether
there are important manager
in corporate
fixed effects
for all relevant
controlling
practices,
One obvious problem with
firm-level
characteristics.
in
is
that
there
be
differences
persistent
approach
might
some
across
to
firms
due
unobservable
third
factors
and
practices
observable
this
with
the manager
fixed
be correlated
might
one
man
to
needs
effects. Practically,
this implies that
separate
ager fixed effects from firm fixed effects.
a manager-firm
construct
We therefore
matched
panel data
us
across different
set that allows
to track the same top managers
firms over time. The data we use are the Forbes
800 files, from
that
these
factors
from 1992 to 1999. The
1999, and Execucomp
data,
on the CEOs of the 800 largest
data provide
information
U. S. firms. Execucomp
allows us to track the names
of the top
in 1500 publicly
five highest
traded U. S. firms.
paid executives
most often
These
include the CEO, but also other top executives,
our
then restrict
the CFO, COO, and subdivision
CEOs.9 We
1969
to
Forbes
to the subset of firms for which
at least one specific top
can be observed
in at least one other firm.10 In doing so,
executive
we also impose that the managers
have to be in each firm for at
least three years.11 For each firm satisfying
these requirements,
attention
in Execucomp
to code the specific position
9. We use the variable
of a
titlean
in a given firm.
manager
10. We discuss
selection
below
issues
associ
(subsection
IV.A) the possible
ated with
this sample
construction.
ensures
are given a chance
11. This three-year
to
that managers
requirement
in a given
their mark"
All of the results
below were
company.
"imprint
replicated
QUARTERLY JOURNAL OF ECONOMICS
1176
we keep
managers
all observations,
the firm has
years where
i.e., including
we
in multiple
firms. The resulting
that
do not observe
over 500 individual
about 600 firms and slightly
sample contains
can
in at least two different
who
be followed
firms.12
managers
a given firm is a
The average
within
length of stay of a manager
in our data. As is customary
in the study of
little over five years
investment
insurance
we exclude
in the banking
and
firms
regressions,
as well
as utilities
from our sample.
To
industries
across
we
in
also
these
firms
exclude
results,
consistency
preserve
the analysis
of noninvestment
variables.13
and SDC data
For this sample of firms, we use COMPUSTAT
a series of annual
to construct
variables.
We concen
accounting
on three different
sets of corporate
trate our analysis
decisions
(investment
strategy)
policy, financial
policy, and organizational
as well as on corporate performance.
The definition
and construc
are reported
in
tion of the specific variables
used in the analysis
the Data Appendix.
III.B.
Sample
Description
means
I presents
and standard
deviations
variables
of interest. The first two columns
for all the
report sum
for the manager-firm
matched
sample. For com
sum
I report equivalent
the last two columns
of Table
parison,
1969
for the entire COMPUSTAT
mary statistics
sample between
our sample to firms where we
and 1999. As expected,
constraining
can observe at least one executive
switch leads us to select larger
executives
from larger firms are more
firms.
Indeed,
likely to
Table
corporate
statistics
mary
move
from smaller
firms.
Executives
between
COMPUSTAT
a
on
to move
the
other
have
firms,
hand, might
higher probability
are
to private firms or positions
firms
below
the
within
that
large
our
in
cannot
tracked
data
be
five
level.
Such
executives
top
firm in our sample also has a somewhat
sources.14 The average
higher
Tobin's
Q ratio, higher
rate of return
on assets,
and higher
The results we
in the sample
construction.
this three-year
requirement
ignoring
were
weaker.
similar
obtained
but, not surprisingly,
statistically
qualitatively
are observed
in strictly more
than two
12. A very small
of managers
subset
different
firms.
we
in the noninvestment
13. When
include
these
observations
regressions,
are virtually
our results
unchanged.
on
in fact bias
focus
14. One could argue
that this required
larger firms may
on firm policies.
our results
effects
of managers
Indeed,
systematic
finding
against
a specific
in a smaller
that
influential
individual
be more
organization
might
more
in day-to-day
activities.
of the top managers
involvement
requires
personal
more
who have
distinct
would
be that managers
An alternative
"styles"
argument
are more
in larger firms.
likely to be found
1177
MANAGING WITH STYLE
TABLE I
Statistics
Descriptive
Manager
characteristics
Manager-firm
matched
sample
Compustat
sample
St.
Total
sales
Mean
St.
5606.5
0.39
Investment
Average
Cashflow
Tobin's
Q
Mean
St.
Mean
dev.
11545.6
5333.3
2.94
0.28
10777.4
2649.6
5878.2
0.50
0.34
2.40
3.85
2.67
2.03
2.05
1.70
0.44
1.43
1.91
0.45
2.10
0.43
2.47
1.45
dev.
dev.
of acquisitions
0.77
1.48
0.65
1.40
0.36
Leverage
Interest
coverage
Cash holdings
0.35
0.39
0.34
0.28
0.45
1.21
35.0
875.1
40.5
663.1
27.6
166.2
0.11
0.16
0.08
0.11
0.17
0.80
Dividends/earnings
N of diversifying
0.11
0.79
0.14
1.05
0.16
0.25
0.32
1.09
0.28
0.91
0.12
0.63
0.07
0.04
0.14
0.03
0.06
N
acquisitions
0.05
R&D
0.05
0.06
0.05
0.06
0.04
0.06
SG&A 0.26
0.98
0.21
0.19
0.18
0.64
0.16
0.11
0.19
0.15
0.10
0.09
0.09
0.12
0.11
0.22
0.08
Advertising
Return
on assets
return
Operating
on assets
10472
6766
Sample size
0.13
38489
a. "Manager-firm matched sample" refers to the set of firm-year observations for firms that have at least
one manager observed in multiple firms with at least a three-year stay at each firm. This sample includes
observations for these firms in the years in which they have other managers that we do not observe in
multiple firms (see subsection III.A for details). "Manager characteristics sample" refers to the set of
firm-year observations for which we can obtain information on the year of birth and educational background
of the CEO (see subsection VI.A for details). "Compustat" is a comparison sample of the 1500 largest listed
firms over the period 1969 to 1999. All samples exclude firms in the banking and insurance industry, as well
as regulated industries.
b. Details on the definition and construction of the variables reported in the table are available in the
Data Appendix.
c. Total sales are expressed in 1990 dollars.
d. Sample size refers to the maximum number of observations; not all variables are available for each
year and firm.
and
lower cash holdings
but slightly
of acquisitions,
to
the
COM
similar
It
levels.
very
average
is,
however,
leverage
to cash flow, investment
firm with
PUSTAT
levels, divi
respect
and
SG&A.
dend payouts,
R&D,
in
transitions
of the executive
the nature
Table II tabulates
our sample. We separate
three major executive
CEOs,
categories:
number
CFOs,
and "Others."
category
cent are
correspond
subdivision
of the job titles in this "Others"
The majority
44 per
to operationally
important
positions:
are Execu
16 percent
CEOs or Presidents,
are COOs; the rest are Vice
and 12 percent
tive Vice-Presidents,
Presidents
and other more
generic
titles.
QUARTERLY JOURNAL OF ECONOMICS
1178
TABLE II
Executive
Transitions
between
Positions
and
Industries
to:
CEO
CFO
117
63%
52 4
75%69%
58
7
71%57%
1060 145
Other
from:
CEO
CFO
71%
Other
30
60%
42%
a. This table summarizes executives' transitions across positions and industries in the manager-firm
matched panel data set (as described in subsection III.A and Table I).All transitions are across firms. The
first entry in each cell reports the number of transitions from the row position to the column position. The
second line in each cell reports the fraction of the transitions in that cell that are between different two-digit
industries.
b. "Other" refers to any job title other than CEO or CFO.
in our sample,
Of the set of about 500 managers
identified
in one firm to
117 are individuals
who move from a CEO position
are
a CEO position
move
to CFO
4
in another
who
CEOs
firm;
are
move
to
who
52
other
CEOs
and
top positions.
positions;
as CFOs, we observe
7
the set of executives
Among
starting
30
58
to
CFO
and
another
CEOs,
becoming
moving
position,
to other top positions.
among the 251 managers
moving
Finally,
in another
106 become CEOs,
and 145
top position,
to another non-CEO,
Within
this
latter
non-CFO
position.
are
we
more
40
than
of
the
transitions
found
that
group
percent
a
or
moves
of subdivision
CEO
subdivision
from
presi
position
in another firm.
dent in one firm to a similar position
row of each cell in Table
In the second
II, we report the
who
move
start
in different
firms
of moves
that are between
two-digit
to note that a large fraction
of the
It is interesting
industries.15
For exam
in our sample are between
industries.
executive moves
are across different
of the CEO to CEO moves
ple, 63 percent
as
are
to CFO moves.
71
of
the
CFO
industries,
percent
two-digit
of the moves
from other top positions
A relatively
lower fraction
fraction
to other
are across
(42 percent)
top positions
seem
if ones believes
that
intuitive
industries.
These
CEOs
CFOs
and
patterns
and firm-specific
need
less industry
knowledge
relatively
instead rely more on general management
skills.16
15. The industry
classification
as reported
in COMPUSTAT.
16. See, for example,
Fligstein
is based
[1990]
on the primary
for a discussion
SIC
code
of this
of each
argument.
and
firm,
1179
MANAGING WITH STYLE
IV. Is There
IV.A. Empirical
Heterogeneity
in Executive
Practices?
Methodology
can be most
The nature
of our identification
strategy
easily
Consider
the dividend
payout ratio as
explained with an example.
the corporate
specification
policy of interest. From a benchmark
we derive residual
at the firm-year
dividend
level after
payouts
across
for
differences
firms
and
any
average
years as
controlling
for any firm-year
such as an earnings
shock,
specific
of a firm. We then
that
affect
the
dividend
shock,
payout
might
in these residual
ask how much
of the variance
dividend
payouts
can be attributed
to manager-specific
effects.
More specifically,
for each dependent
variable
of interest, we
to
estimate
the
propose
regression:
following
well
as
(1)
=
y it at + y? + ?Xit + \Ceo + ^cfo + ^others + *it,
at are
yit stands for one of the corporate
policy variables,
are
a
vector
firm
fixed
fixed
year
effects, y?
effects, Xit represents
of time-varying
firm level controls,
and eit is an error term. The
in equation
variables
(1) are fixed effects for the man
remaining
we
we want
in multiple
to
that
firms. Because
observe
agers
separately
study the effect of CEOs, CFOs, and other top execu
where
on corporate
we create
three different
groups
policies,
are fixed effects
for the group
fixed effects:
\Ceo
who are CEOs in the last position we observe them
managers
are
fixed
effects for the group of managers
who are CFOs
\Cfo
tives
manager
of
of
in,
in
the last position we observe
them in, and ^others are fixed effects
for the group of managers
who are neither CEOs nor CFOs in the
we observe
last position
when
them
in.17 Finally,
estimating
we
account
for
for
serial
correlation
(1),
equation
by allowing
error
term
at
firm
of
the
the
level.18
clustering
It is evident
from equation
of the
(1) that the estimation
never
is
not
fixed
for
effects
who
manager
managers
possible
our
for
leave a given company
during
sample period. Consider,
example,
advances
a specific manager
who never switches
companies
internal
only through
promotions,
maybe moving
and
from
17. We also repeated
all of the analyses
CEO to CEO
below
after separating
etc. The results were qualitatively
to the more
CEO to CFO moves,
similar
moves,
in the paper.
results
aggregated
reported
two alternative
18. In subsection
estimation
to deal
IV.C we propose
methods
issues
with
and better
the
serial
correlation
issues
address
possible
regarding
of the manager
fixed effects.
persistence
QUARTERLY JOURNAL OF ECONOMICS
1180
a CFO
to a CEO
in his/her
position
on
cannot
manager
corporate
practices
from his firm fixed effect. The manager
fixed
are perfectly
to extend
possible
effect
tically
observe
collinear
in this
firm.
The
be estimated
fixed
case.
effect
effect
of this
separately
and the firm
It would
be statis
our analysis
to top managers
whom we
in one firm but who stay in that firm for only a subset of
in our estimation,
sample period. To be conservative
we
decided to stay away from this approach.
however,
Indeed, the
to period-firm-specific
fixed effects for such managers
correspond
to other unobserv
could be more easily attributed
effects, which
the entire
to
factors.
for manager
fixed effects
Instead,
time-varying
we
cor
under our more
that
stringent
require
approach,
across
have to be correlated
(at least) two firms
porate practices
when
the same manager
is present.19
able
matter
clarifies why our identification
us highlight
let
hires,
solely
possible
implica
tions of this sample selection
for more general
inferences
based on
our results. First,
to note that the outside hire of top
it is useful
is far from exceptional
and especially
of CEOs,
among
executives,
the large U. S. public firms that we focus on in this analysis.20
While
the discussion
above
on outside
relies
one could reasonably
who are
Nevertheless,
argue that managers
from the outside are different
from internally
recruited
promoted
one might
have
ones.21 For example,
argue that outside managers
or "better" styles on average,
as firms are willing
to
"stronger"
to find these managers.
look outside
their organization
and most
there is no such thing as a
Finally,
importantly,
we are not
random allocation
to firms. Therefore,
of top executives
on
in this section to estimate
the causal effect of managers
hoping
our
more
to
firm practices.
is
modest. We want
Instead,
objective
assess whether
there is any evidence
that firm policies
systemat
in these firms.
ically change with the identity of the top managers
we replicate
our results
19. For the sake of completeness,
under
this alter
a much
native
As one might
thereby
larger set of executives.
approach,
covering
we find even stronger
have
fixed effects.
manager
expected,
to compute
of CEOs
20. We use the entire
the fraction
Execucomp
sample
We find that
who were
hired
from the outside
rather
than
internally
promoted.
are internally
In a more
detailed
[1997]
only 48 percent
study, Panino
promoted.
a lot by
versus
shows
that
the prevalence
of inside
outside
succession
varies
industry.
21. Suggestive
at stock market
example,
around
Warner,
outsider
evidence
responses
Watts,
succession
to emerge
for this seems
from a set of papers
looking
turnover.
For
to the announcement
of management
returns
and Wruck
[1988] document
high
abnormally
no
overall
effect.
but
events,
significant
1181
MANAGING WITH STYLE
TV.B. Results
IV report F-tests
and adjusted R2 from the
sets of corporate policy
of equation
(1) for the different
For each variable we report in the first row the fit of a
III and
Tables
estimation
variables.
benchmark
fixed
effects,
that
specification
and time-varying
firm
report the change
respectively,
add
the
CEO fixed effects
tively
of executives
groups
second
and
third
(CEOs,
rows also
only firm fixed effects, year
controls. The next two rows,
in adjusted R2 when we consecu
includes
and
CFOs,
the fixed
for all three
The
top positions).
from tests of the
effects
and other
report F-statistics
sets of manager
of
fixed effects.
the
different
joint significance
in
III
and
IV
that man
the
Tables
Overall,
suggest
findings
effects matter
both economically
and statistically
for
ager-specific
as other
the policy decisions
of firms.
CEOs as well
Including
fixed effects increases
the adjusted
J?2 of the estimated
managers'
we
are large
the
models
find
that
F-tests
significantly.
Similarly,
cases the null hypothesis
that all
and allow us to reject in most
the manager
fixed effects are zero. We also see that there are
as to which
seem to be
differences
decision
variables
important
most
affected
decisions.
different
Moreover,
types of
by manager
more
matters
for
matter
CFOs
different
manager
e.g.,
decisions;
now
for financial
in
decisions.
We
discuss
these results
greater
details.
Table III reports our results
for investment
policy (Panel A)
of the
(Panel B). We start with a discussion
policy
in this table
results.
The first variable
is capital
of lagged net property,
and
(as a fraction
plant,
The benchmark
includes
controls
for
specification
and financial
investment
expenditures
equipment).
firm fixed effects, year fixed effects,
cash flow, lagged Tobin's Q,
of total assets. The adjusted R2 for this
and the lagged logarithm
is 91 percent. Even though the fit of this benchmark
specification
model
is already very high, the adjusted R2 increases by 3 percent
we
include
the CEO fixed effects
and by more
than 5
fixed effects. Also,
percent when we include all sets of manager
are large, leading us to reject the null hypothesis
the F-tests
of no
when
effect
joint
two
variables
are
investment
to cash flow sensitivities,
respectively.
for these two variables
differs
slightly
investment
method
in all cases.
next
The
to Tobin's
The
from
Q and
estimation
the one de
in subsection
IV.A. Indeed,
the fixed effects
of interest
to the level of a given variable
here do not relate
(in this case,
to
rather
the
of
but
that
to
variable
investment),
sensitivity
scribed
1182
QUARTERLY JOURNAL OF ECONOMICS
TABLE III
Executive
Effects
on
and
Investment
Financial
Policies
Panel A: Investment
F-tests
policy
on fixed effects for
CEOs
Investment
Investment
Investment
Inv to Q sensitivity
Inv to Q sensitivity
Inv to Q sensitivity
Inv to CF sensitivity
Inv to CF sensitivity
Inv to CF sensitivity
N of acquisitions
N of acquisitions
N of acquisitions
16.74 (<.0001,
19.39 ?.0001,
17.87 (<.0001,
5.33 (<.0001,
2.00 ?.0001,
0.94
192) 53.48
9.40 ?.0001,
1.29
8.45 ?.0001,
1.74
199)
58)
(.0760,55)
(.0006, 55)
(.5294,203)
Leverage
Interest coverage
Interest coverage
0.86
(.9190,199)
0.56
Interest
0.35
(.99, 193)
(.99, 192)
1.28
2.52 ?.0001,
2.48 ?.0001,
204)
201)
5.78 ?.0001,
4.95 ?.0001,
203)
199)
.96
6631
.97
208) 6631
6631
.98
6631
.98
(.0058, 199) 6631
6593
.98
6593
.28
203) 6593
.36
20.29 ?.0001,
4.08 ?.0001,
.97
.25
policy
on fixed effects for
1.43
Other
(.0225,54)
1.21
executives
N
Adjusted
R2
6563
.39
6563
.39
(.0230, 203) 6563
6278
.41
.31
6278
.31
192) 6278
6592
.41
.77
.78
.80
.65
13.85 ?.0001,
50) 2.61 ?.0001,
3.68 ?.0001,
54) 2.53 ?.0001,
6592
202) 6592
6580
6580
.71
1.74 ?.0001,
203) 6580
.72
Dividends/earnings
Dividends/earnings
.95
B: Financial
CFOs
0.99
Dividends/earnings
.94
200) 6631
6631
204)
CEOs
Cash holdings
Cash holdings
Cash holdings
.91
205)
F-tests
coverage
55)
Adjusted
R2
6631
223)
221)
Panel
Leverage
Leverage
(<.0001,
N
6631
198)
(.7276, 194)
2.01 (<.0001,
1.68 (<.0001,
Other executives
CFOs
1.07
(.3368,54)
a. Sample is the manager-firm matched panel data set as described in subsection III.A and Table I.
Details on the definition and construction of the variables reported in the table are available in the Data
Appendix.
b. Reported in the table are the results from fixed effects panel regressions, where standard errors are
clustered at the firm level. For each dependent variable (as reported in column 1), the fixed effects included
are row 1: firm and year fixed effects; row 2: firm, year, and CEO fixed effects; row 3: firm, year, CEO, CFO,
and other executives fixed effects. Included in the "Investment to Q" and "Investment to cash flow" regres
sions are interactions of these fixed effects with lagged Tobin's Q and cash flow, respectively. Also the
"Investment," "Investment to Q," and "Investment to cash flow" regressions include lagged logarithm of total
assets, lagged Tobin's Q, and cash flow. The "Number of Acquisitions" regressions include lagged logarithm
of total assets and return on assets. Each regression in Panel B contains return on assets, cash flow, and the
lagged logarithm of total assets.
c. Reported are the F-tests for the joint significance of the CEO fixed effects (column 2), CFO fixed effects
(column 3), and other executives fixed effects (column 4). For each F-test we report the value of theF-statistic,
the p-value, and the number of constraints. For the "Investment to Q" and "Investment to Cash Flow"
regressions, the F-tests are for the joint significance of the interactions between the manager fixed effects and
Tobin's Q and cash flow, respectively. Column 5 reports the number of observations, and column 6 the
adjusted R2s for each regression.
MANAGING WITH STYLE
1183
Tobin's
for investment
to Q sensi
Q and cash flow. In practice,
on year fixed effects,
investment
tivity, we start by regressing
cash flow, lagged Tobin' Q, the lagged logarithm
of total assets,
firm fixed effects,
and firm fixed effects
with
interacted
lagged
Tobin's Q. We then add to this benchmark
manager
specification
as well
as manager
fixed effects
fixed effects
interacted
with
coefficients
of interest are those
lagged Tobin's Q. The estimated
on the interaction
terms. We proceed
in a similar fashion
in our
to
of
investment
cash
The
flow
results
indicate
study
sensitivity.
in adjusted R2 when
increases
terms of
the interaction
including
fixed effects with cash flow and lagged Tobin's Q, espe
for
to Q sensitivity.
investment
The adjusted R2 goes up
cially
to 98 percent when we allow investment
from 95 percent
to Q to
be manager
specific.
The last variable
in Panel A is number
of acquisitions.
For
we
in adjusted R2 of about 11
this variable
observe an increase
manager
percent
following
surprisingly,
Maybe
are very
managers
the inclusion
we find that
of
the manager
effects
the fixed
fixed
effects.
for the "Other"
inclusion
has an
and that their
significant
not
large impact on the adjusted R2. In regressions
into more
reported here we broke down the set of other managers
CEOs
specific job title categories. We found that the subdivision
and COOs explain most of the increase
in adjusted R2 within
this
especially
"Other"
category.
B of Table III focuses on financial
in all
policy. Included
are
firm
fixed
fixed
the
regressions
effects,
effects, year
lagged
on assets.22
of total assets,
and the rate of return
logarithm
in adjusted R2 in this Panel are of a similar
the increases
Overall,
as those found for the investment
order of magnitude
variables.
The adjusted
R2 of the leverage
increases
from 39
regression
to
we
41
when
include
the
fixed
effects.
manager
percent
percent
an
The adjusted R2 of the interest
alterna
coverage
regression,
Panel
tive measure
as 10
of capital
increases
structure,
by as much
to
41
31
CFOs have
(from
percent
percent
percent).
Interestingly,
a key financial
the strongest
effect on interest coverage,
indicator.
The adjusted
R2 of the cash holdings
goes up by 3
regression
to 80 percent,
from 77 percent
when we compare
the
percent,
benchmark
with
the specification
that includes
all
specification
fixed effects. Finally, managers
manager
appear to be important
determinants
of dividend
in ad
increase
policy, with an overall
22. We
advantage
also experimented
from debt in the
with
leverage
for assets
controls
adding
The results
regressions.
and
uniqueness
were
unaffected.
tax
TABLE IV
Executive
on Organizational
Effects
Panel
Strategy
and
A: Organizational
strategy
on fixed
effects for
F-tests
CEOs
N
of diversifying
of diversifying
acquis.
N
N
of diversifying
acquis.
R&D
R&D
R&D
acquis.
CFOs
2.06 ?.0001,
204)
1.23
(.0163,202)
1.74
1.86 ?.0001,
2.27 ?.0001,
145)
3.60 ?.0001,
2.88 ?.0001,
4.03 ?.0001,
95)
143)
Ot
3.97
(.0007,53)
45)
4.46
Advertising
Advertising
Advertising
SG&A
SG&A
SG&A
33.55 ?.0001,
13.80 ?.0001,
95)
0.84
(.6665,21)
6.10
0.82
(.7934,42)
0.7
123)
118)
TABLE IV
(CONTINUED)
Panel
B: Performance
on
F-tests
CEOs
Return
on assets
Return
on assets
Return
on assets
Operating
return
fixed
effects
CFOs
2.04 ?.0001,
2.46 ?.0001,
201)
2.61 ?.0001,
1.60 ?.0001,
216)
for
O
217)
3.39 ?.0001,
54)
4.
on assets
Operating
return
on assets
Operating
return
on assets
217)
0.66
(.9788,58)
1
a. Sample is the manager-firm matched panel data set as described in subsection III.A and Table I. Details o
table are available in the Data Appendix.
b. Reported in the table are the results from fixed effects panel regressions, where standard errors are clustere
column 1) the fixed effects included are row 1: firm and year fixed effects; row 2: firm, year, and CEO fixed effects;
c. Also included in the "N of diversifying acquisitions," "R&D," "advertising," and "SG&A"regressions are the
of diversifying acquisitions" regressions also include a dummy variable for whether the firm undertook any acqui
"Operating return on assets" regressions is the logarithm of total assets.
d. Reported in the table are F-tests for the joint significance of the CEO fixed effects (column 2), CFO fixed effe
each F-test we report the value of the F-statistic and, in parentheses, thep-value and number of constraints. Also
?2s (column 6) for each regression.
QUARTERLY JOURNAL OF ECONOMICS
1186
we find that dividend
R2 of 7 percent. Moreover,
policy
to be more substantially
affected by the CEOs than by the
CFOs or other top executives.
our results
IV reports
for the organizational
Table
policy
variables
(Panel B).
(Panel A) and for corporate
performance
we find that top executives
on the
have
Again,
large effects
The fit of the diversification
realization
of these variables.
regres
sion improves by 11 percent.23 The adjusted R2s of the R&D and
cost
both increase by 5 percent.
advertising
Finally,
regressions
as
to
of
total
the
ratio
SG&A
sales,
by
cutting
policy,
proxied
on the identity
to systematically
of the CEOs.24
appears
depend
justed
seems
a priori intuition we find that CEOs and other top
to have larger effects on organizational
managers
strategy
than CFOs do.
on two different mea
IV focuses
Panel B of Table
Finally,
we consider
sures of corporate
measure
is
The first
performance.
In line with
seem
in the benchmark
of return on assets.
Included
here are firm fixed effects, year fixed effects, and the
specification
of total assets. Our results
show that accounting
per
logarithm
across
The F-tests
varies
formance
top executives.
significantly
are large for all groups
and the adjusted
of managers,
R2 in
creases by more
than 5 percent.
a standard
rate
concern with
this latter finding
is that the
possible
across
on
rate
return
assets
in
of
differences
managers
systematic
in
not
but
rather
differences
reflect
actual
may
performance
or
in aggressiveness
of accounting
differences
willing
practices
ness to "cook the books."25 In order to address
this concern, we use
measure
an alternative
that is less
of performance
accounting
One
true
captures
a
ratio
of
total
(as
operating
performance:
operating
also
of operating
assets). We find that this measure
performance
on
across
The
the
F-tests
varies
top managers.
systematically
are
in
and
the
increase
ad
CEO fixed effects
jointly significant
of
6 percent.
for this measure
Interestingly,
justed R2 is nearly
subject
to accounting
and
manipulations
cash
performance,
we
cannot
reject
the null
better
flow
hypothesis
that
the fixed
not reported
down
broke
the set of other
23. In regressions
here we again
that the subdivision
We
found
into more
managers
specific
job title categories.
in adjusted
of the increase
R2.
and COOs
CEOs
explain most
R&D
and
for advertising
24. The
expenditures,
regressions
expenditures,
on a smaller
of
due to the inconsistent
estimated
SG&A were
availability
sample
in COMPUSTAT.
these variables
we
are more
the
25. In an ongoing
investigating
systematically
project,
to
and how they relate
in accounting
of manager
fixed effects
practices
importance
on real variables
in this paper.
the results
reported
1187
MANAGING WITH STYLE
on the group
effects
of the CFOs
and
"Other"
executives
are all
zeros.
rV.C.
Robustness
of Results
a series
to verify
of specification
checks
the
we
of the findings
the
reported above. First,
replicate
at
above after collapsing
the data
the manager/firm
analysis
an alternative
level. This provides
serial
way to address possible
concerns. More
correlation
the firm
starting with
specifically,
the
residuals
year data, we estimate
firm-year
by regressing
We
conduct
robustness
of interest on firm fixed effects, year fixed effects,
policy variables
and the time-varying
then collapse
firm controls. We
these an
the
nual residuals
by manager-firm
spell. Last, we reestimate
in this collapsed
set. We find,
in
fixed
data
effects
manager
not reported here, that our results are robust to this
regressions
alternative
estimation
technique.
fixed effects iden
Second, one might worry that the manager
of managerial
above do not imply persistence
style across
a
to
and
For
firms.
consider
who
manager
jobs
example,
happens
we
be part of a firm during a period of intense acquisition
activity;
a positive
fixed effect for that manager
estimate
acquisition
might
tified
even though
in his future firm. This
that effect does not persist
concern
is especially
for some of the lumpier policy
warranted
in our analysis.
variables
covered
in the first column of Table V. Here
We address
this concern
we use a more parametric
to analyze
the persistence
specification
in managerial
we construct
for each policy variable,
styles. More
specifically,
as described
residuals
above. We then
manager-firm
a manager's
in his second firm on his
residual
regress
average
in the first firm we observe her/him
residual
in.26 Re
average
coefficients
ported in the first column of Table V are the estimated
on the first firm residual
for each of the corporate variables.
We find a positive
and statistically
significant
relationship
a manager's
in his last job and his residual
in
residual
for
all
the
with
?-statistics
job
varying
policy variables,
4 and 16 and R2 between
5 and 35 percent. Moreover,
the
are also economically
in these regressions
estimated
coefficients
a top
for most
of the variables.
For example,
very significant
between
his first
between
1 percent
associated
with
manager
is associated
with about 0.5 percent
the
26. Note
investment
that we cannot
directly
to Q and investment
extra
extra
leverage
leverage
in his first job
in his second
this more
parametric
perform
to cash flow sensitivities.
exercise
for
QUARTERLY JOURNAL OF ECONOMICS
1188
TABLE V
Persistence
of Manager
Investment
Effects:
Real
Data
Real
data
0.05
(0.02)
[0.01]
N of acquisitions
Leverage
Cash holdings
Dividends/earnings
(0.05)
[0.13]
0.40
(0.03)
[0.21]
0.74
(0.05)
[0.35]
0.80
(0.04)
[0.51]
N of diversifying acquis.
R&D
Advertising
SG&A
Return on assets
(0.06)
[0.07]
0.65
(0.05)
[0.33]
0.62
(0.08)
[0.02]
0.14
(0.01)
[0.03]
0.31
(0.07)
[0.40]
Operating return on assets
(0.03)
[0.07]
and
Placebo
Data
Placebo
data
0.01
(0.02)
[0.00]
0.49 - 0.02
(0.05)
[0.00]
0.02
(0.05)
[0.01]
0.05
(0.07)
[0.01]
0.06
(0.12)
[0.02]
0.25
0.04
(0.05)
[0.00]
0.09
(0.05)
[0.02]
0.11
(0.06)
[0.01]
0.08
(0.08)
[0.02]
0.02
(0.06)
[0.01]
0.18
0.03
(0.11)
[0.00]
a. Sample is the manager-firm matched panel data set as described in subsection III .A and Table I.
Details on the definition and construction of the variables reported in the table are available in the Data
Appendix.
b. Each entry in this table corresponds to a different regression.
c. In column 1we regress for each of the policy variables a manager's average residual in his second firm
on his average residual in his first firm. In column 2 we regress for each of the policy variables a "manager's
average residual" in his second firm three years prior to the manager joining that firm on his true average
residual in his first firm. See subsection IV.C for details.
d. The first number in each cell is the estimated coefficient on the first job residual, the second number
is the estimated standard error (in parentheses) and the third number is the estimated R (in square
brackets).
1189
MANAGING WITH STYLE
for which we find particularly
corporate
policies
in Tables
III and IV (such as acqui
fixed effects
or R&D)
to
dividend
also prove
diversification,
policy,
job. Moreover,
strong manager
sitions,
in this more paramet
generate
higher R2 and larger coefficients
are consistent
a persistence
with
ric setup. These
results
of the
across
fixed effects
firms.
manager
to argue that the manager
fixed effects cap
Third, we want
on corporate
ture the active
of managers
influence
decisions.
an alternative
There
that is poten
is, however,
interpretation
our findings,
with
but does not imply an active
tially consistent
on their companies.
a model
of the
Suppose
have no specific skills or styles but boards
managers
A manager
be
believe otherwise.
may, by coincidence,
mistakenly
in a wave of acquisitions
in her or his prior firm, and this
involved
as an "acquisition
be wrongly
may
perceived
style" by other
If this leads to the hiring ofthat manager
boards.
by a firm that
would have gone on an external
expansion
phase even without
influence
world
of managers
where
we might
a positive
the manager,
fixed effect
estimate
acquisition
for that manager.
we analyze
To investigate
this alternative
the
interpretation,
in
of
the
observed
Un
changes
corporate
precise
timing
policies.
der the story outlined
above, we would not expect to find a precise
and the change
the arrival of the new manager
overlap between
some of the
one
in corporate
In
that
fact,
expect
might
practices.
new man
in
arrival
of
the
the
changes
policies
actually precede
as
has
to
the board
the changes.
undertake
ager,
already decided
ifmanagers
do play the active role in shaping
in policy will only happen after the
the changes
policies,
is hired.27
manager
we construct
in corporate
residuals
average
Practically,
pol
in
that each manager
icies as described
above but now assume
On
the other hand,
corporate
our data
turnover
turnover
set joins his second firm three years prior to the actual
date and leaves
that firm at the time of the actual
date. In doing this, we are careful to censure the data for
the second firms at the actual date of arrival of the new managers
in these firms. We then regress these average pre-turnover
resid
in the first
uals in the second firm on the true average
residuals
firm.
Column
2 of Table V presents
the results
of this exercise.
We
27. This test relies on a specific
One could still argue
that
timing assumption.
to bring
in
about
the manager
any changes
boards,
they do not need
although
once the new
the changes
nevertheless
corporate
only go ahead with
strategy,
arrives.
manager
1190
QUARTERLY JOURNAL OF ECONOMICS
in these placebo
find that the estimated
coefficients
regressions
are economically
1.
those in column
very small compared with
are very close to zero, and all
Most
of the estimated
coefficients
but two are statistically
These
results
confirm
insignificant.28
once
in corporate
that the bulk of the changes
the
policy happen
new manager
has joined the firm and not prior to his arrival,
an active role of the managers
in implementing
these
suggesting
changes.
IV. D. Magnitude
of the Manager
Fixed
Effects
a
So far, we have seen that manager-specific
effects explain
in
outcomes.
fraction
of
firm
the variation
significant
policies and
we would
like to assess how big the observed differ
Additionally,
ences
we look at the distribu
are. Therefore,
managers
tions of the fixed effects estimated
above. For example, we can see
a manager
extra
how much
in the upper
tail of the
leverage
to a man
relative
contributes,
leverage fixed effects distribution
In Table VI we
ager who is in the lower tail of that distribution.
between
report the size distribution
the regressions
in Tables
of the manager
III and IV. We
fixed
effects
show median,
for each of
standard
and seventy-fifth
percentile.
we weigh
each fixed effect by
deviation,
twenty-fifth
percentile,
When
these statistics,
computing
error.
error to account
the inverse of its standard
for estimation
VI
in
variation
size
Table
shows
that
the
the
of the
Overall,
is
fixed
effects
To
manager
economically
large.
highlight
just a
row 1 of Table VI shows that the difference
few examples,
be
tween a manager
at the twenty-fifth
the
of
distribution
percentile
of investment
level and one at the seventy-fifth
is 0.20.
percentile
To give a benchmark,
to
ratio of capital expenditures
the average
in our sample
assets
is about 0.30. The difference
between
the
in the leverage distribu
and seventy-fifth
twenty-fifth
percentile
level of
tion is 0.16 (row 5), compared with an average
leverage
we observe about 0.7 acqui
.34 in our sample. For acquisitions,
per year for the firms in our sample. Row 4 of Table VI
in the bottom quartile
shows that a manager
reduces the number
a manager
in the top quartile
of acquisitions
while
by -0.49,
sitions
increases
the
last
in
of acquisitions
by 0.44 per year. Finally,
in corporate
VI we see that the variation
in the top
is also large. A manager
effects
the number
row of Table
performance
fixed
28. We
also repeated
in Tables
III and
followed
a similar
in the less parametric
exercise
IV and obtained
similar
findings.
framework
1191
MANAGING WITH STYLE
TABLE VI
Size
of Manager
Distribution
Fixed
25th
75th
deviation
percentile
percentile
2.80
-0.09
0.11
0.66
-0.16
0.12
1.01
-0.17
0.28
1.50
-0.54
0.41
-0.05
-56.0
-0.03
0.09
51.7
0.02
Standard
Median
Investment
Inv
to Q
0.00
-0.02
sensitivity
Inv to CF sensitivity
N
0.04
of acquisitions
-0.04
0.01
0.00
0.00
Leverage
Interest coverage
Cash holdings
Dividends/earnings
N of diversifying
acquis.
return
0.22
860.0
0.06
-0.01
0.59
-0.13
0.11
-0.04
1.05
-0.28
0.21
0.00
0.00
0.00
0.00
0.04
0.66
0.04
0.07
-0.10
-0.09
-0.01
-0.03
0.02
0.09
0.01
0.03
0.00
0.08
-0.02
0.03
R&D
SG&A
Advertising
Return on assets
Operating
Effects
on assets
a. The fixed effects used in this table are retrieved from the regressions reported inTables III and IV (row
3).
b. Column 1 reports the median fixed effect for each policy variable. Column 2 reports the standard
deviation of the fixed effects. Columns 3 and 4 report the fixed effects at the twenty-fifth percentile and
seventy-fifth percentile of the distribution, respectively.
c. Each fixed effect is weighted by the inverse of its standard error to account for estimation error.
increases
of the distribution
the rate of return on assets
quartile
a manager
In contrast,
in the bottom quartile
by about 3 percent.
reduces
the rate of return on assets by about 3 percent.
fixed effects for most of the corpo
Also, the median manager
are not different
as
rate variables
from zero. This is interesting
one might
have expected
that the nature
of the sample construc
tion and the focus on outside hires might
have led us to select a
This seems to indicate
that this pos
different
type of managers.
sible selection
issue is not an important
factor in our analysis.
rV.E. Management
Styles
a wide degree
section documents
of heteroge
previous
in the way managers
conduct
their businesses.
We now
to go a step further
and investigate
whether
there are
in managerial
For exam
patterns
overarching
decision-making.
some
do
favor
internal
while
managers
growth
ple,
strategies
The
neity
want
others rely more on external
observe
that some managers
sive than others?
ceteris paribus? Or can we
growth,
more aggres
overall are financially
QUARTERLY JOURNAL OF ECONOMICS
1192
To answer
we analyze
struc
the correlation
questions,
we
ture between
the manager
retrieve
specific fixed effects which
from the set of regressions
above. We form a data set that, for
contains
the estimated
fixed effects for the various
each manager,
in this
the different variables
corporate variables. More precisely,
new data set are the manager
in Tables
III
fixed effects estimated
and
these
IV for the specification
(row 3).
In practice,
we
propose
that
to estimate
= a +
(2) F.E.(y)j
all groups
includes
regressions
of managers
as follows:
?F.E.(z)j+eJ,
and y and z are any two corporate
j indexes managers,
in equa
variable
variables.
that
the
Note
right-hand-side
policy
is noisy by definition.
tion (2) is an estimated
which
coefficient
of ?.
This will
lead to a downward
bias in an OLS estimation
we
are
with which
the fixed effects
Since
know
the precision
where
we use a GLS estimation
to account
measured,
technique
error in the right-hand-side
measurement
We
variable.
error
of the standard
each observation
by the inverse
independent
which
variable,
oq
we
obtain
from
the
first
for the
weigh
on the
step
regressions.
are reported
in Table VII. Each
a
to
The
different
corresponds
regression.
maxi
10
the
for
is
about
these
R2
average
percent;
regressions
mum R2 is about 33 percent, while
the minimum
R2 is about 0.03
seem
to
A
few
from this
emerge
patterns
percent.
interesting
seem to differ in their approach
toward
table. First, managers
external versus
internal growth. We see from the last two rows of
The
element
results
in this
table
of this
column
1 that
there
exercise
is a strong negative
correlation
between
as internal
can be interpreted
invest
and
diversifica
through acquisitions
growth
which
capital expenditures,
and external
ments,
who follow expansion
tion. In a similar vein, managers
strategies
in less
and diversification
external
engage
through
acquisitions
Row 7 of Table VII shows that the coefficients
R&D expenditures.
a different
to account
for
this analysis
29. We also repeated
technique
using
error in the estimated
fixed effect. For each set of fixed effects we
measurement
of the observations
observations
formed averages
by size), and
by deciles
(ranking
on each other
in the above
set of fixed
effects
the transformed
then regressed
we also
manner.
similar
results.
This produces
described
Finally,
qualitatively
a factor
to
able
effects. We were
for the full set of fixed
conducted
analysis
seem to support
the
The factor
three different
eigenvectors.
loadings
distinguish
are two
versus
external
and internal
view
that financial
growth
aggressiveness
of style.
dimensions
important
1193
MANAGING WITH STYLE
TABLE VII
Relationship
between
the Manager
Fd
d Effects
Return
on
Cash
Investment
Inv to Q Inv to CF
holdings
Leverage
R&D
assets
Investment
0.00
Inv to Q sensitivity
6.8
(0.00)
0.03
(0.92)
(0.01)
Inv to CF
-0.01
sensitivity
0.02
Cash holdings
(0.6)
-1.10
(0.11)
-0.79
-0.46
Leverage
(1.62)
-0.39
(1.71)
-0.28
(1.72)
-0.63
-0.40
R&D
(0.55)
0.07
(0.59)
0.08
(0.60)
-0.03
(0.17)
-0.23
-0.02
Advertising
(0.00)
0.01
(0.02)
0.02
(0.01)
-0.01
(0.04)
-0.01
(0.01)
0.00
0.25
(0.11)
0.31
N of acquisitions
(0.01)
-0.27
(0.01)
0.08
(0.01)
0.23
(0.04)
0.01
(0.01)
0.02
(0.15)
-0.01
(0.15)
-0.01
N of divers,
(0.11)
-0.30
(0.10)
-0.14
(0.10)
0.14
(0.00)
0.01
(0.01)
0.01
(0.00)
-0.01
(0.00)
-0.01
(0.13)
-0.22
(0.15)
-0.30
(0.14)
0.10
(0.01)
0.54
(0.02)
0.06
(0.00)
-4.32
(0.00)
-3.36
(0.01)
(0.04)
(0.03)
(0.56)
(0.21)
(0.90)
(0.62)
acquis.
SG&A
-0.23
(0.01)
-0.12
(0.05)
-0.02
(0.02)
0.11
a. Each entry in this table corresponds to a different regression.
b. Each entry reports the coefficient from a weighted regression of the fixed effects from the row variable
on the fixed effects from the column variable. Observations in these regressions are weighted by the inverse
of the standard error on the independent variable.
c. Coefficients that are significant at the 10 percent level are highlighted in bold.
are -0.01
from a regression
of R&D on either of these variables
errors of 0.002. Moreover,
and
standard
capital expenditures
are
correlated.
R&D expenditures
significantly
positively
is that managers
who are more
Another
finding
interesting
with
to be less investment-cash
sensitive
also appear
on ? in a regression
to
of the investment
coefficient
to cash flow fixed effects (column
Q fixed effects on the investment
error of 0.11.
2 and row 3 of Table VII) is -0.23 with a standard
one
two
of
This suggests
that managers
follow
may
strategies:
investment-Q
sensitive.
The
use
either
erated
sions.
the
or use the cash flow gen
the firm's market
valuation
as
a
deci
benchmark
for
their investment
by operations
in light of the current debate on
is interesting
This result
investment
in firms. So far, most
flow sensitivity
across
in investment
behavior
differences
dimension.
Our findings
constraint
sug
to cash
research has analyzed
firms along a financial
QUARTERLY JOURNAL OF ECONOMICS
1194
di
need to be aware of another
gest that one might
important
mension:
heterogeneity.
manager-specific
a negative
On the financing
correlation
side, we observe
between
the leverage
fixed effects
and the cash holding
fixed
is a proxy for financial
If cash holding
effects.
slack, this result
the idea that managers
may differ in the conservatism
supports
or aggressiveness
else
of their financing
choices.
Everything
some
less
debt
and
managers
prefer holding
relatively
equal,
more
do.
cash than other managers
from the last row of Table VII, we see that managers
Also,
with
ment
low levels
of SG&A
over
and R&D
expenditures,
fewer acquisitions.
Managers
are also less investment-Q
sales
favor more
while
invest
internal
in significantly
they engage
levels of SG&A to sales
higher
sensitive
investment-cash
and more
with
flow
sensitive.
as we already
in Table IV, there are system
showed
Finally,
across the managers
in
in corporate performances
atic differences
we measure
as rate of return
our sample, whether
performance
on asset
or use
of Table
VII, we
systematically
rate decisions.30
to Q sensitivities
managers
an operating
In the last column
income measure.
see that the fixed effects
in return on assets are
in corpo
to some managerial
fixed effects
related
We
who
with higher
investment
that managers
on
assets
fixed
return
effects.
Also,
higher
more
sheet or have
cash on the balance
find
have
keep
levels of SG&A have lower rates of return on assets. Last,
higher
in more acquisitions
and more diversifying
who engage
managers
are also associated
levels.
with
lower performance
acquisitions
latter findings
that not only are there systematic
These
suggest
in decision-making
are systematically
differences
differences
fixed
between
correlated
but that these
managers
with
the performance
effects.
V. Possible
Interpretations
As we discussed
interpretations
30. Note
on
in return
here we found
fixed effects
error of 0.05.
in Section
of the observed
of the Manager
II, there
manager
Fixed
are at least
fixed
effects.
Effects
two different
One view
the fixed effects
between
that there is a strong positive
relationship
on assets.
not reported
return
In a regression
assets
and operating
on assets
in a regression
of the return
coefficient
that the estimated
a standard
on assets
on operating
is 0.41, with
fixed effects
return
is 24 percent.
The R2 ofthat
regression
is
1195
MANAGING WITH STYLE
that managers
impose their own idiosyncratic
style onto the firm
are
some
If
less performance-enhancing
than
they head.
styles
some of these managers
to adopt
may cause corporations
others,
An alternative
view
is that managers
policies.
value-reducing
or relative
differ in their comparative
skills and firms
advantage
are the best match
who
choose managers
for their
optimally
current
In this case, there is no such thing as a
needs.
strategic
"better" or "worse" style but rather different
styles that are best
suited to different
environments.
While
it is beyond
the scope of
this paper to fully sort out these two alternative
interpretations,
we provide
some evidence
in the following
that the
suggesting
fixed effects cannot
observed managerial
a
pure
story alone.
by
optimal matching
V.A.
Sorting
Based
on Firm
and
be reasonably
Industry-Level
explained
Characteristics
stems from our results
in
A first interesting
piece of evidence
the last column
of Table VII. Certain
manager-specific
styles
seem to correlate
with manager
in
fixed effects
systematically
more
are
hold
less
who
invest
managers
cash,
performance:
in more M&A activity or spend more on
engage
sensitive,
ment-Q
also have
lower performance
SG&A,
are consistent
with the view
findings
for performance
than others, we need
ble alternative
More
interpretations.
fixed effects. While
these
that some styles are better
to be cautious
about possi
these results
specifically,
could also be consistent
with
the view
that certain
styles are
of economic
distress.
Firms
better
suited than others to periods
is
whenever
be
"turnaround
might
hiring
managers"
performance
are
in
to
order
that
poor
particularly
implement
specific policies
seems less
in those times. However,
beneficial
this interpretation
when we consider
convincing
column of Table VII. Policies
in the last
patterns
or more
like high SG&A spending,
are
intense M&A and diversification
which
activities,
negatively
in performance,
correlated
with
the fixed effects
do not at first
our intuition
of turnaround
sight coincide with
practices. More
the correlation
that managers
relies on the assumption
are hired
in the
to changes
in response
This
of the firm (e.g., poor performance).
our
seems
inconsistent
with
that
however,
interpretation,
finding
most of the changes
in firm policy happen after the manager
joins
a firm (Table V).
of the matching
to assess
the relevance
Yet another way
is
to
whether
there
is
ask
any apparent
sorting of
interpretation
over, this interpretation
with
particular
styles
economic
environment
QUARTERLY JOURNAL OF ECONOMICS
1196
one
For example,
styles across industries.
CEOs to be more prevalent
in
financially
aggressive
more
industries
while
behavior
be
may
high growth
cost-cutting
of a norm in more mature
industries.
For that purpose, we relate
different
management
expect
might
the manager
fixed effects to industry measures
of Tobin's Q and
sales growth. We fail to find any robust systematic
relationship.31
a pure optimal matching
Another
piece of evidence
against
comes from replicating
our findings
in Tables
interpretation
III,
the time-varying
firm level controls.
IV, and V after dropping
a
we
under
will
pure matching
Indeed,
model,
identify manager
fixed effects only if the firms' strategic
needs at a given point in
time are not fully captured by the time-varying
firm controls that
we have
in all of the regressions
included
above. A natural
im
we
of
this
is that the manager
fixed effects
argument
plication
have
identified
should
become
economically
if we drop the available
time-varying
this exercise, we find only statistically
perform
in our estimates.32
small changes
economically
stronger
V.B.
Governance,
and statistically
controls. When we
insignificant
and
and Style
Compensation,
In addition, we propose
to investigate
whether
the estimated
fixed effects, and especially
the manager
fixed effects in
are systematically
to differences
related
in corpo
performance,
across firms.
are
rate governance
If some management
styles
"better" than others, one might
that
better
firms
expect
governed
will be more
with
these "good" styles.
likely to select managers
To address
this issue, we briefly turn to an alternative
data
some
CDA
which
infor
source,
governance
Spectrum,
provides
manager
mation
for most of the firms in our sample. From CDA Spectrum
we compute,
is in, the fraction
of
for the second firm a manager
shares held by large block holders.33 We then regress
the man
on this
in corporate
and performance
ager fixed effects
practices
governance
vide
other
variable.
governance
Unfortunately,
measures,
this database
does not pro
as board
composition
such
variables.
The
results
of this analysis
are reported
in the first
column
of
to the rest of
this analysis
for firm-specific
relative
conditions
repeat
the firm's deviation
from its
For each corporate
industry.
policy we compute
mean
in the year prior to a turnover.
Then we check
industry
(asset-weighted)
the direction
to predict
of the deviation
from the industry mean
the
whether
helps
we find no statistically
robust patterns.
hired by the firm. Again,
type of manager
are available
as well
as other nonreported
results
below
32. These
results
from the authors
upon request.
for details.
33. See the Data Appendix
31. We
their
1197
MANAGING WITH STYLE
to a different
corresponds
are the fixed effects on
where
the dependent
variables
regression
is the gov
the corporate
variables
and the independent
variable
we find a positive
ernance measure.
Most
and sta
interestingly,
Table
VIII.
Each
cell
in this
column
the manager
between
tistically
relationship
significant
fects in return on assets and the fraction of shares held
most of the policy fixed effects
block holders.34 Moreover,
to the manager
fixed
found to be significantly
related
are
to
also
related
governance
performance
significantly
same
fixed
ef
by large
that we
in
effects
with the
to Q
investment
the
for
only
relationships
are
at
tra
activity
statistically
significant
sign, although
and M&A
sensitivity
ditional
levels.
While we do not want
to push these results
too far due to the
of the governance
that
variable,
they appear to suggest
with performance-enhanc
better governed
firms select managers
ing styles and as such might
point toward efficiency
implications
of the managerial
heterogeneity.
com
fixed effects to manager
Finally, we relate the manager
crudeness
levels. If the correlation
of manager
styles with perfor
pensation
mance
is symptomatic
of some managerial
styles being better
on average
than others, we might
expect boards to pay a premium
this analysis, we first
for managers
with these styles. To perform
construct manager-specific
that are net of
residuals
compensation
firm fixed
firm
effects, year fixed effects, and other time-varying
characteristics.
More precisely, we estimate
regres
compensation
on firm
sions where we regress
of compensation
the logarithm
of total assets,
the logarithm
the
fixed effects, year fixed effects,
on
rate
return
and
of
total
the
of
the
assets,
sales,
logarithm
tenure on the job; we also include dummy variables
for
manager's
executive.
is a CEO, a CFO, or another
whether
the manager
top
we consider are the logarithm
measures
of
The two compensation
as
bonus
the
total compensation
cash
(defined
salary plus
plus
in a year) and the logarithm
of
of stock option granted
value
we
From
resid
these
compute
regressions
salary compensation.
measures
in our sample. We
ual compensation
for each executive
on the fixed effects derived
in Tables
residuals
above to account
the GLS estimation
described
error in the right-hand-side
variables.
for the measurement
in columns 2 and 3 of
The results of this exercise are reported
we see that managers
with higher
Table VIII. Most
importantly,
then regress
these
III and IV. We use
able
we
34. Similarly,
and the manager
find a positive
relationship
on operating
fixed effects
the governance
between
on assets.
return
vari
QUARTERLY JOURNAL OF ECONOMICS
1198
TABLE VIII
Governance,
and Manager
Compensation,
Percent
Fixed
Residual
-
shares
held by
large
on assets
Return
block
Total
holders
0.012
0.72
compensation
(0.24)
0.278
to Q
Inv
to CF
0.246
sensitivity
0.08
(0.053)
(0.26)
-0.33
0.009
-0.94
-0.33
0.008
-0.568
(0.08)
2.18
-0.617
(0.092)
-0.027
SG&A
(0.093)
(0.90)
1.36
0.10
0.00
0.09
0.03
(0.131)
acquisitions
(0.18)
-0.94
(0.007)
of diversifying
(0.29)
0.009
R&D
(0.006)
N
(0.07)
0.04-0.01
(0.021)
of acquisitions
(0.13)
(0.15)
(0.007)
N
(0.03)
-0.02
-0.26
Leverage -0.018
Advertising
(0.06)
(0.04)
-0.001
holdings
(0.01)
-0.06
-0.06
(0.088)
Cash
(0.57)
0.19
-0.004
sensitivity
Salary
compensation
0.02
-0.08
(0.252)
Inv
compensation
2.86
(0.006)
Investment
Effects
(0.93)
(0.54)
(0.05)
(0.03)
(0.04)
-0.16
(0.04)
(0.05)
-0.09
(0.25)
a. Each entry in column 1 corresponds to a different regression. The dependent variable in each of these
regressions is the manager fixed effect on the row variable, as retrieved from Tables III and IV). The
independent variable is the fraction of shares held by 10 percent ormore block holders in the second firm we
observe the manager in (from CDA Spectrum). The first number in each cell is the estimated coefficient; the
second number is the estimated standard error. Each observation isweighted by the inverse of the standard
error of the dependent variable.
b. Each entry in columns 2 and 3 corresponds to a different regression. The independent variable in each
of these regressions is the manager fixed effect on the row variable, as retrieved from Tables III and IV). The
dependent variable is a manager-level residual from a compensation regression where we control for firm
fixed effects, year fixed effects, the logarithm of total assets, the logarithm of total sales, return on assets,
tenure on the job, and dummies for whether the manager is a CEO, a CFO, or another top executive (see
subsection IV.E for details). The two different compensation measures are the logarithm of total compensa
tion (column 2), defined as salary plus bonus plus the Black and Scholes value of stock options grants, and
the logarithm of salary compensation (column 3). In the reported regressions, each observation is weighted
by the inverse of the standard error of the independent variable to account for estimation error.
on assets fixed effects receive higher
total com
residual
as
as
relation
This
well
salary compensation.
higher
pensation
variables.
It
for
is
both
significant
compensation
statistically
ship
we
a
correlation
such
is interesting
that
find
given
strong positive
com
controlled
for return on assets when
that we have already
to
net
out
the
residual
pay-for-performance
puting
compensation
return
1199
MANAGING WITH STYLE
Firms thus appear to pay
relationship.
rates of
who are associated
with higher
on
to
With
effects
the
fixed
regard
a
Two
is
murkier.
the
little
ables,
picture
a premium
for managers
return on assets.36
the specific policy vari
of the policy effects that
are significantly
to the performance
fixed effects
related
(invest
are significantly
ment
to Q sensitivity
and advertising)
related,
The correlations
of compen
with the same sign, to compensation.
same
of the
sation with
and SG&A, while
cash holdings
sign as
are
weak.
those obtained
for performance,
statistically
Finally,
we
and diver
that managers
with high levels of acquisition
on total compensation.
earn a premium
This is
activity
and
since we saw in Table VII that the acquisition
surprising,
are negatively
to the fixed
related
diversification
fixed effects
is statis
this relationship
effects on return on assets.37 However,
find
sification
tically
insignificant
if we
VI. Observable
look at cash
compensation
Managerial
Characteristics
only.
of
evidence
sections have provided
suggestive
previous
in
differences
decisions
among top manag
corporate
systematic
ers. However,
of managerial
fixed effects does not
the presence
traits or character
tell us much about which
specific managerial
In this section we
their decision-making.
istics might
influence
The
characteristics:
the possible
role of two such managerial
analyze
One expects MBA
edu
MBA graduation
and birth cohort/age.38
either
cation to affect managerial
decision-making
through hu
or because
man
of a selection
and social capital
accumulation
a
relevant managerial
also be
effect. Similarly,
birth cohort might
a mechanical
we might
be
still be concerned
about
35. While
relationship
we see that the positive
tween
and performance,
stock option
(or bonus)
grants
even for cash salary
alone.
relation
holds
not reported
the relationship
36. In regressions
here we also
investigated
If
in performance
and compensation
between
the manager
fixed effects
change.
are particularly
at
to learn over time that certain managers
successful
firms were
a bigger
one would
would
that these managers
value,
creating
expect
experience
we did not find
in pay from their first to their second
increase
job. Interestingly,
of managers
could
that the compensation
This
indicate
any such relationship.
bid up in their first job and that the
with
better
styles were
already
perceived
career.
in the managers'
earlier
about managers'
type happens
learning
in a study of the determinants
of CEO pay, Rose and Shepard
37. Similarly,
firms are paid more.
diversified
of larger and more
[1997] find that managers
and Ellison
cross-sectional
38. In a related
Chevalier
[1999]
paper
study
fund managers.
in the behavior
of mutual
and performance
differences
They show
earn higher
rates
schools
better
and those who attended
that younger
managers
from schools with higher
SAT scores are
of returns.
They also show that managers
more
and
In a survey
in their investment
of CFOs Graham
behavior.
risk-taking
an MBA
also use more
[2001] find that CFOs who
degree
report holding
Harvey
an MBA.
than those without
valuation
techniques
sophisticated
QUARTERLY JOURNAL OF ECONOMICS
1200
of managers
trait as it is often suggested
that older generations
are relatively
more
in their decision-making.39
conservative
V7.A.
Construction
Sample
to a sample
of the study, we limit ourselves
we
use
800
the Forbes
data from 1969 to
of CEOs.40 As above,
1999 and Execucomp
data from 1992 to 1999 to create a list of
two
this information
with
CEO names. We
then complement
data sources
that provide background
information
for
different
For
this
section
and the
Executives
of Corporate
Directory
this data set of
America. We then merge
to COMPUSTAT
characteristics
and SDC
managerial
construct
all the relevant
variables
(as de
corporate
the S&P
CEOs:
these
is Who
Who
observable
data
of Corporate
and
in the Data Appendix).
Means
are
in
columns
sample
reported
scribed
this
somewhat
surprisingly,
an MBA
The average
is only about 40 percent.
completed
in our sample was born in 1928. The earliest year of birth is
we
is 1966. Not
find that
and the latest
surprisingly,
Perhaps
have
CEO
1884
younger
school.
VLB.
and summary
statistics
for
3 and 4 of Table I.
of CEOs who
the fraction
generations
Empirical
are more
likely
to have
attended
business
Methodology
For all of the corporate variables
y ?^ considered
above, except
to Q sensi
to cash flow sensitivities
and investment
investment
we
estimate
the
tivities,
regression:
following
(3)
yijt
=
?Xit + hMBAj + y]Cohortj + yTenure3
+ a? + X, + eijt,
t indexes
is a
time, Xit
j indexes CEOs,
a
variable
that
vector of firm characteristics,
is
dummy
MBAj
an MBA and 0 otherwise,
is
1 if CEO j' completed
equals
Cohortj
the birth cohort of CEO j, a? are firm fixed effects,
\t are year
in equation
included
fixed effects, and eijt is an error term. Also
of years the CEO has been in office,
(3) is a control for the number
where
i indexes
Tenure
j. This
firms,
control
should
account
for possible
entrenchment
we
to
characteristics
the two specific
39. Obviously,
propose
managerial
that we
characteristics
of the individual
study here constitute
only a small subset
one would
like to know
to decision-making.
For example,
be relevant
believe might
or even personal
more
about
past professional
experience,
family
background,
of the
limit
the richness
obvious
data
constraints
Unfortunately,
psychology.
we can perform.
exercise
on other
more
to find background
information
difficult
40. It is much
top
in the data sources
that we consulted.
executives
1201
MANAGING WITH STYLE
we allow
effects. Finally,
at the individual manager
level.
There are two points worth
emphasizing
(3) includes firm fixed effects.
First, equation
or career
error
concern
of the
for clustering
term
not
therefore
about equation
(3).
is
Our identification
across firms
in the
differences
our identification
comes from
driven
by average
hire.
Instead,
type
they
or birth cohort of the
in the MBA
status
variation
within-firm
to equa
of equation
the estimation
CEO. Second,
(3), in contrast
tion (1), no longer relies on our ability to track the same manager
turnover
into different
still
firms over time. While
managerial
of CEOs
is changes
for identification
drives our test, the only requirement
in CEO characteristics
of
within
firms over time. One implication
we rely on
to our prior analysis,
is that, in contrast
this feature
to isolate
the effect of MBA
both
internal
hires
and external
and birth cohorts.
graduation
on invest
A study of the effect of managerial
characteristics
a some
ment
to cash and investment
to Q sensitivities
requires
what
different
MBA and birth
to Q sensitivities
We estimate
the effect of
empirical
specification.
to cash flow and investment
cohort on investment
the following
regression:
by estimating
(4)
Iljt
=
?Xit + ^MBAj
+
+
*
^Cohortj
^{Tenurej
+
+
b2MBAj
^Cohortj
+
^{Tenurej
*
CFit Ki(t_1} + h^MBAj
*
CFit Kiit-1} + ^Cohortj
*
CFit Ki{t_1}
+
*
Q?(?_1}
*
Qi{t-i)
y3Tenurej
*
*
+ Xt + eijt,
+
CFit Ki{t_1} + ai3
Q?(?-i)Ot? ai2
Qi{t?1}
*
is a vector of interactions
firm
between
ai2
CFitIKi{t_1)
fixed effects and cash flow, a?3 * Q^-i)
is a vector of interactions
firm fixed effects and lagged Tobin's Q and all the other
between
as above. By analogy
are defined
with
variables
(3),
equation
where
differences
(4) allows for firm-specific
equation
to Q sensitivities.
cash flow and investment
VLC.
in investment
to
Results
in Table IX. Each row corresponds
in all rows except rows (2) and
to a different
regression.
Reported
on the birth cohort and MBA
coefficients
(3) are the estimated
the
from equation
(3). In rows (2) and (3) we report
dummy
on the interactions
of these managerial
coefficients
estimated
The
traits
results
with
equation
cash
(4).
are presented
flow
and
lagged
Tobin's
Q,
respectively,
from
1202
QUARTERLY JOURNAL OF ECONOMICS
TABLE IX
CEOs'
Birth
Cohort
variable:
Dependent
(1) Investment
(2) Inv to Q sensitivity
and MBA
on Firm
Effects
Year of birth (*10)
.017
.016
(.010)
(.003)
.118
(.014)
(4)N of acquisitions
.001
(.037)
(5) Leverage
(6) Interest
.000
(.003)
of diversifying
acquis.
-.036
(.015)
(10) R&D
-.003
(.002)
(11)Advertising
-.001
(.002)
(12) SG&A
.002
(.003)
(13) Return
on assets
-.003
(.004)
(14) Operating
return
on assets
(.056)
.011
(.002)
(9) N
(.026)
-.017
(.008)
-.005
(8) Dividends/earnings
-.075
(.007)
(2.67)
(7) Cash holdings
.017
(.006)
.024
-6.50
coverage
MBA
(.005)
-.013
(3) Inv to CF sensitivity
Policies
-.002
(.003)
.924
(3.41)
-.001
(.003)
-.009
(.004)
.040
(.017)
-.002
(.002)
.003
(.003)
-.004
(.003)
.012
(.005)
.008
(.003)
a. Sample is the set of firm-year observations forwhich we could obtain information on the year of birth
and MBA graduation of the CEO, as described in subsection VIA and Table I. Details on the definition and
construction of the variables reported in the table are available in the Data Appendix.
b. Each row, except rows (2) and (3), corresponds to a different regression. Reported are the estimated
coefficients on year of birth and MBA dummy. Also included in each regression are year fixed effects, firm
fixed effects, and a control for CEO tenure. Other included controls are as follows: row (1): lagged Tobin's Q,
cash flow, and lagged logarithm of total assets; row (4): return on assets and lagged logarithm of total assets;
rows (5) to (8): return on assets, cash flow, and lagged logarithm of total assets; row (9): return on assets, cash
flow, logarithm of total assets, and a dummy forwhether the firm undertook any acquisition that year; rows
(10) to (12): return on assets, cash flow, and logarithm of total assets; rows (13) and (14): logarithm of total
c. The reported coefficients in rows (2) and (3) are from a unique regression of investment on year fixed
effects, lagged Tobin's Q, cash flow, lagged logarithm of total assets, firm fixed effects, firm fixed effects
interacted with lagged Tobin's Q and cash flow, CEO tenure, CEO tenure interacted with lagged Tobin's Q
and cash flow, year of birth, year of birth interacted with lagged Tobin's Q and cash flow, an MBA dummy,
an MBA dummy interacted with lagged Tobin's Q and cash flow. Reported in rows (2) and (3) are the
estimated coefficients on the interactions between year of birth and the MBA dummy with lagged Tobin's Q
and cash flow, respectively.
d. Standard errors are in parentheses. Standard errors are corrected for clustering of observations at the
individual manager level.
1203
MANAGING WITH STYLE
start with
We
from
earlier
birth
the
investment
variables. We find that CEOs
are associated
with
lower investment
in year of
increase
ten-year
equal. Each
(as a ratio to lagged prop
expenditures
cohorts
else
levels, everything
birth decreases
capital
erty, plant, and equipment)
by about 1.7 percentage
point. MBA
on average,
more
1.6
appear
percentage
graduates
point
but this effect is more noisily estimated.
Rows (2) and (3) consider
to cash flow and investment
to Q sensitivities.
investment
We
on
more
to
find that MBA graduates
Tobin's Q
average
respond
to invest
and
less
to cash
expenditures.
cation appear
when making
flow availability
when
about capital
deciding
is interesting.
CEOs with MBA edu
pattern
to follow more
the "textbook
closely
guidelines"
This
to
investment
decisions.
They are less responsive
sources of funds but more responsive
the availability
of internal
as embodied
to the presence
in Tobin's Q.
of growth opportunities
to
We find that older generations
of CEOs are less responsive
investment
level. However,
somewhat
setting
we do not find that younger
generations
weigh
sources of financing
less internal
when making
deci
investment
to cash sensitiv
sions. To the contrary, we find that investment
we find no sig
ities are larger among younger
cohorts. Finally,
Tobin's Q when
more surprisingly,
nificant
relationship
behavior
acquisition
We
next
consider
between
the two managerial
(row (4)).
the financial
attributes
and
policy variables. We find that
lower levels of financial
lever
older generations
of CEOs choose
increase
in
else equal
(row (5)). Each
age, everything
ten-year
CEO year of birth increases
financial
leverage by about 2.5 per
on the effect of MBA gradua
centage points. The point estimate
tion on financial
is
but statistically
leverage
positive
insignifi
cant. Consistent
the leverage
interest
(row
coverage
results,
birth cohorts and
CEOs
from
earlier
(6)) appears
among
higher
In row (7)
lower (but not significantly
so) among MBA graduates.
we find a significant
between
cash holdings
negative
relationship
as
lower levels of cash holdings
and year of birth. If one regards
with
or more
financial
the sign of a more
sophisticated
aggressive
these results
indicate
that older generations
lack
policy,
might
or aggressiveness.
The effect of MBA
that kind of sophistication
on cash holdings
is economically
and statistically
graduation
we
no
find
robust
divi
While
between
insignificant.
relationship
dends
negative
graduation.
over
earnings
correlation
and birth
between
cohort
(row
dividend
(8)), there
payout
is a robust
and
MBA
QUARTERLY JOURNAL OF ECONOMICS
1204
Next, we study the
with MBA degrees,
and
to
ger tendency
engage
and, to a
generations
less R&D
variables.
CEOs
strategy
organizational
CEOs from earlier cohorts, have a stron
moves
in diversification
(row (9)). Younger
in
lesser degree, MBA
engage
graduates
between
(row (10)). We find no consistent
relationship
advertising expenditures
(row (11)) or SG&A (row (12)) and the
CEO
characteristics.41
In summary,
in Table
IX suggest
the results
that the man
we
in
fixed
the
of
the
effects
first
ager
paper can, in
part
identify
to
be
attributed
observable
individual
characteristics
such
part,
as education
and year of birth. CEOs with MBAs
appear to be on
in a higher
to engage
level of
average more aggressive,
choosing
more
hold
debt, and pay less dividends.
expenditures,
capital
on
to be less aggressive
CEOs
from older generations
appear
a lower level of capital
lower
expenditures,
and higher
cash holdings.
leverage,
we also investigate
status
the effect of MBA
and
Finally,
and
The
birth cohort on accounting
(rows
(13)
(14)).
performance
average,
financial
most
choosing
is the positive
between
finding
relationship
on
return
of
and
Rates
corporate
graduation
performance.
are more
assets
MBA
than 1 percentage
for
gradu
point higher
are associated
ates. Similarly,
CEOs who hold an MBA
degree
on assets.
returns
with higher
operating
interesting
MBA
VII.
Conclusion
The primary
systematic
objective of this paper is to document
across man
in corporate
differences
decision-making
an empirical
to analyze
framework
the impor
agers. We develop
tance of a manager
in the observed unexplained
varia
dimension
behavioral
in several
across
geneity
hetero
corporate
practices. We find considerable
of all investment,
The
realizations
managers.
to
variables
and other organizational
appear
strategy
financing,
on
in
While
executives
the
charge.
systematically
specific
depend
we follow does not allow us to estimate
the causal
the framework
on firm policies
or performance,
a
it provides
effect of managers
tion
simple and intuitive
approach
that such
selection
problems
41.
sample
values
This
lack of statistical
smaller
becomes
much
in COMPUSTAT.
to deal with many
of the first-order
a study might
face.
significance
in these
in part reflect
the fact
may
due to the many
regressions
that
our
missing
1205
MANAGING WITH STYLE
in
differences
We
also find that some of the managerial
are
to
in
related
differences
corporate
practices
systematically
with higher perfor
managers
Moreover,
corporate
performance.
mance
and are
fixed effects receive higher
levels of compensation
more
more
concen
to
in
is
be
found
firms
where
likely
ownership
across
in behavior
trated. Finally, we can tie back the differences
in part
managers
Older generations
to some
observable managerial
characteristics.
on average,
are financially
more
an
MBA
who
hold
follow
managers
degree
of managers,
while
conservative,
more aggressive
strategies.
Data
The
corporate
four major
data
Merger
and
variables
sources:
Acquisition
Appendix
used
in this paper
COMPUSTAT,
database,
Spectrum.
is a data source
COMPUSTAT
ables for more
than 7500 individual
are extracted
from
the SDC Platinum
Execucomp,
that
reports
and
financial
CDA
vari
in
The data are
territories)
drawn
from annual
10-K filings
and 10-Q filings,
and
reports,
with
substantial
sample
large companies
public ownership.
is a finan
SDC Platinum
and Acquisition
database
Merger
cial data set collected
Financial.
It
contains
infor
by Thompson
on M&A
in
mation
transactions
firms
and
the
public
by private
the United
States
(and
corporations
since
1976.
established
States
from 1979 to the present. Reported
for each trans
are the name
and industry
of the acquiring
and target
as
as
well
other
variables
about
the
of
the sale.
firms,
specifics
on
Standard
and Poor's Execucomp
data contain information
the name and total compensation
of up to the five highest
paid
United
action
executives
for all firms in the S&P 500, S&P MidCap
400, and
600 since 1992. The reported
S&P SmallCap
data
compensation
cover base salary, bonus, and the value of granted
stock options in
the current year.
on institutional
CDA Spectrum
collects
information
share
to the
from the SEC's 13f filings. The 1978 amendment
holdings
and Exchange
Act of 1934 requires
all institutional
with more
than $100 million
to
under management
are reported
to the SEC. Holdings
their shareholdings
report
on 13f filings.
Institutions
fall into five distinct
catego
quarterly
Security
investors
ries:
insurance
mutual
banks,
funds,
companies,
independent
investment
advisors
(such as brokerage
firms), and others (which
include pension
funds and endowments).
mainly
QUARTERLY JOURNAL OF ECONOMICS
1206
The
are defined as follows:
used in the analysis
specific variables
is capital
Investment
item
(COMPUSTAT
expenditures
at
and
the
128) over net property,
begin
plant,
equipment
ning of the fiscal year (COMPUSTAT item 8).
Tobin's
Average
Q is defined
as the market
value
of assets
divided by the book value of assets (COMPUSTAT item 6),
the market
where
value
assets
plus the market
sum of the book value
item 60) and balance
item 74).
Cash
flow
is defined
of assets
equals the book value of
common
of
value
less the
equity
of common
(COMPUSTAT
equity
sheet
deferred
taxes
(COMPUSTAT
as the sum of earnings
extraor
before
dinary items (COMPUSTAT item 18) and depreciation
item 14) over net property,
and
(COMPUSTAT
plant,
at the beginning
of the fiscal year
(COMPU
equipment
STAT item 8).
Leverage
as long-term
is defined
debt
(COMPUSTAT
item
9) plus debt in current liabilities (COMPUSTAT item 34)
over long-term debt plus debt in current liabilities
plus the
item
book value of common equity
60).
(COMPUSTAT
as cash and short-term
invest
Cash holdings
is defined
over
ments
net
item
(COMPUSTAT
1)
property,
plant, and
equipment
at the beginning
of the fiscal
year
(COMPU
is earnings
before depreciation,
coverage
item 13) over interest
(COMPUSTAT
expenses
STAT item 8).
Interest
and
tax
interest,
(COMPUSTAT item 15).
Dividends
over earnings
is the ratio
of the sum of common
dividends (COMPUSTAT item 21) and preferred dividends
before
19) over earnings
item 13).
(COMPUSTAT
item
(COMPUSTAT
and
interest,
tax
depreciation,
R&D is the ratio of R&D expenditures (COMPUSTAT item
46) over lagged total assets (COMPUSTAT item 6).
Advertising
is the ratio
of advertising
expenditures
(COM
PUSTAT item 45) over lagged total assets (COMPUSTAT
item 6).
is the ratio
SG&A
expenses
of selling,
and administrative
general,
over
sales
item 189)
(COMPU
(COMPUSTAT
STAT item 12).
N
of acquisitions
fiscal year.
N of diversifying
is the total number
acquisitions
of acquisitions
is the number
in the
of acquisitions
1207
MANAGING WITH STYLE
industries
during the fiscal year in two-digit
in.
those the acquirer
operates
currently
on assets
is the ratio of EBITDA
Return
different
from
(COMPUSTAT
item 18) over lagged total assets (COMPUSTAT item 6).
return
Operating
on assets
is the ratio
of operating
cash
flow (COMPUSTAT item 308) over lagged total assets
(COMPUSTAT item 6).
com
is the total value of a manager's
as
It
is
for
the
fiscal
defined
the
year.
pensation
package
sum of cash salary, cash bonus, and the Black and Scholes
in that year.
value of options granted
Total
compensation
Percent
is the fraction of
shares held by large block holders
or
10 percent
shares that are owned by block holders with
more
on
of the firm's outstanding
shares
the
last
(based
quarter
University
of each year).
of Chicago
Graduate
and
Research,
Institute
Massachusetts
Economic
National
Policy
Bureau
Centre
School
for
of Technology
of Economic
of Business,
National
Bureau
and Policy
Research
of
Economic
Sloan
Research,
and
School
Centre
of Management,
and
Economic
for
Research
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