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  3. 2021
  4. Preliminary Program
  5. Corporate Finance: Behavioral
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Corporate Finance: Behavioral

Paper Session

Tuesday, Jan. 5, 2021 3:45 PM - 5:45 PM (EST)

Hosted By: American Finance Association
  • Chair: Kelly Shue, Yale University

In Too Deep: The Effect of Sunk Costs on Corporate Investment

Marius Guenzel
,
The Wharton School of the University of Pennsylvania

Abstract

Sunk costs are unrecoverable costs that should not affect decision-making. I provide evidence that firms systematically fail to ignore sunk costs and that this leads to significant distortions in investment decisions. In fixed exchange ratio stock mergers, aggregate market fluctuations after parties enter into a binding merger agreement induce plausibly exogenous variation in the final acquisition cost. These quasi-random cost shocks strongly predict firms' commitment to an acquired business following deal completion, with an interquartile cost increase reducing subsequent divestiture rates by 8-9%. Placebo cost shocks, derived from market fluctuations that did not affect actual acquisition costs, do not predict divestiture rates. Consistent with an intrapersonal sunk cost mechanism, distortions from actual cost shocks are concentrated in firm-years in which the acquiring CEO is still in office.

Trading on Talent: Human Capital and Firm Performance

Anastassia Fedyk
,
University of California-Berkeley
James Hodson
,
Jozef Stefan Institute

Abstract

How is skilled human capital reflected in firm performance? By directly observing the monthly career migration patterns of 37 million employees of US public companies, along with their education, demographics, and skills, we explore firm-level "skill premia." Our key empirical finding is that, contrary to the individual-level patterns documented by the labor economics literature, technical and social skillsets negatively forecast both financial and operational performance at the firm level. We explore several potential mechanisms for this finding. Social skillsets display counter-cyclical performance, suggesting that their negative premia reflect their risk profiles. Meanwhile, negative premia on technical skillsets show patterns consistent with over-exuberance regarding contemporaneous popular technologies: IT and Mobile Network skillsets carry negative premia in early 2000s, while Data Analysis, Software Engineering, and Web Development display negative premia during the 2010s.

Supervisor Informal Authority and Employee Financial Misconduct

Zachary Kowaleski
,
University of Notre Dame
Andrew Sutherland
,
Massachusetts Institute of Technology
Felix Vetter
,
London School of Economics

Abstract

We study the influence of middle managers (“supervisors”) on financial misconduct at branches of financial advisory firms. Our most conservative estimates indicate that individual supervisor fixed effects explain as much variation in branch misconduct as firm fixed effects. We find similar evidence when we study supervisors switching firms following branch closures that are unrelated to misconduct, indicating our results are not spuriously generated by matching. Our results are concentrated in firms that theory suggests are most likely to delegate authority to supervisors—firms with complex operations, distant branches, and experienced supervisors. Supervisors affect misconduct through their personnel decisions, attention to employees with past misbehavior, and their own industry rules and ethics training. Our paper is the first to explore the role of supervisor discretion, distinct from firm-level policies or executive characteristics, in influencing financial misconduct.
Discussant(s)
Samuel Hanson
,
Harvard Business School
Efraim Benmelech
,
Northwestern University
Mark Egan
,
Harvard University
JEL Classifications
  • G3 - Corporate Finance and Governance