This paper investigates whether executives with risk-seeking tendencies engage in greater tax avoidance and find that CEOs who possess private pilot licenses (our proxy for risk-seeking) significantly reduce firm's cash effective tax rate. Risk-seeking has a considerably stronger effect on tax avoidance compared with other commonly studied executive characteristics, including overconfidence and ability. Cross-sectional tests reveal that the baseline results are not sensitive to managerial remuneration incentives, suggesting that intrinsic incentives derived from endowed traits are not easily moderated by extrinsic motivation from compensation contracts. Additionally, we find that managerial oversight helps channel CEOs risk-seeking tendencies towards value creating tax planning endeavors. Further tests reveal that risk-seeking CEOs reduce effective tax rates only when they can engage in complex, risky, and intricate income shifting strategies. Taken together, our paper highlights the role and contexts in which risk-seeking tendencies influence corporate tax planning activities.

We find that co-opted boards facilitate more erratic and arbitrary decision-making, contributing towards default risk. A one standard deviation increase in co-option increases default risk by 11% relative to normal levels. Supporting the notion that co-option makes decision-making more erratic, we find that stock return volatility and fundamental volatility are higher among co-opted boards and that strategic conformity among such firms is lower. We find no evidence that our results may be driven by firm risk-taking, however, we do find evidence suggesting that co-opted boards are less engaged and involved in strategic decision-making. We also find that external oversight mechanisms, in the form of institutional investors, financial analysts, media coverage, and takeover susceptibility, mitigate the documented effect. Overall, our study documents new evidence on the adverse effect of co-opted boards on firm default probability.

This paper investigates the effect that employee treatment schemes have on corporate innovation performance. We find that firms with better employee treatment schemes produce more and better patents through improving employee satisfaction and teamwork. Additional tests suggest that our main findings cannot be attributed to job security, unionization, reverse causality, and omitted variables. We also find that firms with better employee treatment schemes produce patents that enhance market valuation and facilitate better future operating performance. Collectively, our findings show that treating employees well benefits firms and shareholders, for well treated employees are encouraged to create intellectual property.

This paper examines the role of local attitudes toward gambling on corporate innovative activity. Using a county’s Catholics-to-Protestants ratio as a proxy for local gambling preferences, we find that firms located in gambling-prone areas tend to undertake riskier projects, spend more on innovation, and experience greater innovative output. We contrast the local gambling effect with chief executive officer (CEO) overconfidence, another behavioral effect reported to influence innovation. We find that local gambling preferences are a stronger determinant of innovative activity, with CEO overconfidence being more relevant to innovation in areas where gambling attitudes are strong.

Using a sample of U.S. firms during the 1989–2015 period, we study whether the efficiency with which managers generate revenue is sensitive to monitoring by institutional shareholders. We find that institutional ownership is positively related to managerial efficiency. Our identification relies on a discontinuity in ownership around the Russell 1000/2000 Index threshold and suggests that the positive effect of institutional ownership on managerial efficiency is causal. Furthermore, we document that monitoring by institutions helps improve managerial efficiency, and that an exogenous increase in institutional ownership leads to higher pay-for-performance sensitivity. Finally, we find consistent results after excluding from our sample forced CEO turnovers, suggesting that institutional shareholders force incumbent managers to exert greater effort rather than influence the replacement of less efficient CEOs. Taken together, our findings highlight the important role played by institutional shareholders in getting the most out of corporate executives.

We examine whether corporate investment, financing, and cash policies are interdependent and follow a predictable pattern in line with the firm life-cycle. We find that investments and equity issuance decrease with firm life-cycle, while debt issuance and cash holdings increase in the introduction and growth stages and decrease in the mature and shake-out/decline stages of the firm’s life-cycle. These results are robust after using various proxies for life-cycle and controlling for firm, CEO and board level characteristics. Collectively, our results show that corporate policies follow a firm life-cycle.

ABSTRACT We examine the role and economic consequences of emotions in shaping the judgment of corporate executives. Analyzing a large sample of U.S. public firms, we find that sunshine-induced good mood leads managers to make upwardly biased earnings forecasts. Importantly, our evidence implies that managers become less susceptible to the sunshine priming effect in unambiguous settings, when their forecasts are subject to stricter external monitoring, and when they have stronger incentives to issue accurate forecasts. Additional tests show that equity market participants discern less informative signals from forecasts influenced by sunshine and that managers prone to the sunshine priming effect impose costs on their firms in the form of higher information risk and equity financing costs. Reflecting that labor markets also play a disciplinary role, we find that mood-prone managers suffer adverse career outcomes. We provide the first large-scale analysis on the nuanced ways in which emotions affect top executives. JEL Classifications: G02; G30; M40; M41.