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Using 14,800 forecasts of one-year S&P 500 returns made by Chief Financial Officers over a 12-year period, we track the individual executives who provide multiple forecasts to study how their beliefs evolve dynamically. While CFOs’ return forecasts are systematically unbiased, their confidence intervals are far too narrow, implying significant miscalibration. We find that when return realizations fall outside of ex-ante confidence intervals, CFOs’ subsequent confidence intervals widen considerably. These results are consistent with a model of Bayesian learning which suggests that the evolution of beliefs should be impacted by return realizations. However, the magnitude of the updating is dampened by the strong conviction in beliefs inherent in the initial miscalibration and, as a result, miscalibration persists. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

We show that corporate bankruptcy leads to a significant reduction in employee earnings, which in turn increases financial distress costs for firms via higher ex ante wages. Annual employee earnings deteriorate by 10% when a firm files for bankruptcy and remain below pre-bankruptcy earnings for at least six years. Affected employees are likely to work fewer hours and leave the firm, industry, and local labor market. We estimate that compensating wage differentials for this “bankruptcy risk” increase the present value of ex ante wages paid by the firm by up to 12% of annual wages. Overall, this paper shows that bankruptcy risk reduces risk-sharing between the firm and workers, and the resulting additional labor costs are large enough to be a first-order consideration in corporate capital structure decisions.

We study time-series and cross-firm variation in corporate cash holdings from 1920 to 2014. The recent increase in cash is not unique in magnitude. However, the recent divergence between average and aggregate cash is new and entirely driven by a shift in cash policies of newly public firms, whereas within-firm changes have been negative or flat since the 1940s. Cross-sectional relations between cash holdings and firm characteristics are stable throughout the century, though characteristics explain little of the trends in aggregate cash. Macroeconomic conditions, corporate profitability and investment, and (since 2000) repatriation taxes explain aggregate cash over the last century.Received August 23, 2017; editorial decision April 28, 2018 by Editor Andrew Karolyi.

Does corporate culture matter? Can differences in corporate culture explain why similar firms diverge with one succeeding and the other failing? To answer these questions, we use a novel survey and interview-based analysis of 1,348 North American firms. Over half of senior executives believe that corporate culture is a top-three driver of firm value and 92% believe that improving their culture would increase their firm's value. Surprisingly, only 16% believe their culture is where it should be. Executives link culture to ethical choices (compliance, short-termism), innovation (creativity, taking appropriate risk), and value creation (productivity, acquisition premia). We assess these links within a framework that implies cultural effectiveness depends on interactions between cultural values, norms, and formal institutions. Our evidence suggests that cultural norms are as important as stated values in achieving success.

Using a novel dataset of accounting and market information that spans most publicly traded nonfinancial firms over the last century, we show that U.S. federal government debt issuance significantly affects corporate financial policies and balance sheets through its impact on investors’ portfolio allocations and the relative pricing of different assets. Government debt is strongly negatively correlated with corporate debt and investment, but strongly positively correlated with corporate liquidity. These relations are more pronounced in larger, less risky firms whose debt is a closer substitute for Treasuries. Indeed, we find a strong negative relation between the BAA-AAA yield spread and government debt, highlighting the greater sensitivity of more highly rated credit to variation in the supply of Treasuries. The channel through which this effect operates is investors’ portfolio decisions: domestic intermediaries actively substitute between lending to the federal government and the nonfinancial corporate sector. The relations between government debt and corporate policies, as well as the substitution between government and corporate debt by intermediaries, are stronger after 1970 when foreign demand increased competition for Treasury securities. In concert, our results suggest that large, financially healthy corporations act as liquidity providers by supplying relatively safe securities to investors when alternatives are in short supply, and that this financial strategy influences firms’ capital structures and investment policies.

We provide new evidence that the subjective “look of competence” rather than beauty is important for CEO selection and compensation. Our experiments, studying the facial traits of CEOs using nearly 2,000 subjects, link facial characteristics to both CEO compensation and performance. In one experiment, we use pairs of photographs and find that subjects rate CEO faces as appearing more “competent” than non-CEO faces. Another experiment matches CEOs from large firms against CEOs from smaller firms and finds large-firm CEOs look more competent. In a third experiment, subjects numerically score the facial traits of CEOs. We find competent looks are priced into CEO compensation, more so than attractiveness. Our evidence suggests this premium has a behavioral origin. First, we find no evidence that the premium is associated with superior performance. Second, we separately analyze inside and outside CEO hires and find that the competence compensation premium is driven by outside hires—the situation where first im...

We investigate how the length of the net operating loss carryback period affects corporate liquidity and marginal tax rates. We estimate that extending the carryback period from two to five years, ...

We use a direct measure of overconfidence to test whether managerial overconfidence manifests itself in corporate policies. We collect a unique panel of over 6,500 quarterly stock market forecasts (expected returns, and the 10 th and 90 th percentiles of their perceived distributions) by Chief Financial Ocers (CFOs) over a span of more than six years. On average, CFOs are miscalibrated: realized returns are within respondents’ 80% confidence intervals only 40% of the time. Controlling for firm characteristics, companies with overconfident CFOs (i.e., CFOs with narrow confidence intervals) invest more, have higher debt leverage, pay out fewer dividends, use proportionally more long-term than short-term debt, engage in market timing activity, and tilt executive compensation towards performance-based bonuses. In addition, merger announcements by firms with overconfident CFOs are negatively received by investors.

We present new evidence on the distribution of the ex ante risk premium based on a multi-year survey of Chief Financial Officers (CFOs) of U.S. corporations. Currently, we have responses from surveys conducted from the second quarter of 2000 through the third quarter of 2001. The results in this paper will be augmented as future surveys become available. We find direct evidence that the 10-year expected risk premium is stable and equal to about 4%. In contrast, the one-year risk premium is highly variable through time. In particular, after periods of negative returns, CFOs significantly reduce their one-year market forecasts, disagreement (volatility) increases and returns distributions are more skewed to the left. We also examine the relation between ex ante returns and ex ante volatility. The relation between the one-year expected risk premium and expected risk is negative. However, our research points to the importance of horizon. We find a significantly positive relation between expected return and expected risk at the 10-year horizon. Finally, our last survey was delivered September 10, 2001. We are able to measure the increase in perceived risk following the September 11, 2001 crisis.