We examine changes in corporate policies following recessions during CEO tenures to evaluate the value of learning. CEOs with recession experience demonstrate expertise in risk-shifting strategies that can contribute to higher firm value and performance during subsequent recessions. Specifically, Recession CEOs use conservative capital structure and allocation during expansions, providing excess capacity and financial slack to accumulate additional cash reserves during economic contractions, resulting in lower bankruptcy risk. As a result, Recession CEOs are equipped to raise more capital in recessions, which results in higher asset growth fueled by investments in acquisitions and capital expenditures. We also examine prior recessions and find poor performers learn to invest more and perform better in subsequent contractions. Our results are strengthened through cumulative recession experiences, when downturns are deeper, and at cyclical firms, where economic cycles are most impactful and Recession CEOs are more relevant. Finally, we use time-varying industry downturns, matching, and CEO turnovers for inference. Overall, we offer novel evidence of valuable CEO learning around risk-taking following direct managerial experience as a firm policy determinant across economic conditions.

Numerous scholars have investigated the link between option-based compensation and innovation in public firms, generally concluding options motivate innovative activities better than alternative compensation methods. In most studies, the evidence of causality is weak or suffers from econometric concerns, leading to questions regarding the conclusions. We use the implementation of FAS 123R as a quasi-natural experiment to explore the role option compensation has in incentivizing innovation. FAS 123R increased the cost of granting options as compensation, resulting in a plausibly exogenous shift away from options. Using an updated sample of patent applications, we do not observe any decline in innovation. Despite a similar empirical design, our results differ from those of Mao and Zhang (2018), due to truncation bias inherent in their patent data. Overall, using our updated data, our findings are inconsistent with conclusions from prior studies and suggest option-based compensation does not drive innovation.