UC Berkeley

This dissertation consists of three chapters, each of them analyzing different important managerial choices: payout policies, financing decisions and acquisitions.

The first chapter argues that workers’ unemployment risk may induce firms to adopt conservative payout policies. I show that firms increase their dividend payout following sharp increases in unemployment insurance generosity, a policy effective in reducing human costs due to layoffs. By focusing on policy changes plausibly unrelated to macroeconomic conditions, I show that firms increase payout by about 6% in presence of stronger protection for unemployed workers. Consistent with public insurance crowding out private insurance by firms, I find that this effect is driven by firms with worse growth prospects, high labor intensity, and in more volatile industries. Overall, this evidence suggests that labor market considerations play an important role in shaping firms’ payout decisions.

The second chapter, co-authored with Ulrike Malmendier and Hui Zheng, focuses on financing choices made by potentially biased managers. Analyzing the traits and biases of individual man- agers, such as CEOs, in isolation can result in the misattribution of corporate outcomes, especially under assortative matching. We illustrate this insight for the role of CEO and CFO overconfidence in financing decisions. We show that the CFO’s rather than the CEO’s type dominates in determining the choice of external financing when we consider their beliefs jointly. At the same time, overconfident CEOs (and not CFOs) obtain significantly better financing conditions, as predicted by our theoretical model. Moreover, overconfident CEOs tend to hire overconfident CFOs whenever given the opportunity, generating a multiplier effect.

The third chapter analyzes the ex-post ouctomes of acquisitions presenting different degrees of synergies between acquirors and targets. Theoretical and empirical work suggests that mergers involving vertically integrated firms are more likely to produce gains in productivity. I show that the post-merger change in productivity is positively related to the degree of relatedness between acquirors and targets. On the other hand, firms acquiring unrelated targets display a drop in stock and cash flow volatility, suggesting that such acquisitions are motivated by managers willing to “enjoy the quiet life.” Yet this information is not apparent to investors at announcement and only becomes available slowly. Notably, acquirors of unrelated targets significantly underperform acquirors of related targets in the 18 months following a merger announcement. These results suggest that the announcement returns may be a poor proxy for the “diversification discount,” and that investors may be unable to realize how different industries exhibit different degrees of connection.