This dissertation consists of two chapters in the field of corporate finance and one chapter in the field of behavioral economics.
For the first chapter, entitled "Board of Directors: The Value of Industry Experience," I construct a unique 10-year panel dataset that contains an experience measure for the directors of 650 large corporations in the U.S., and I investigate the marginal effect of board experience on firm performance. I find that firms with a higher percentage of directors with industry experience have the following characteristics. First, they have higher abnormal and accounting returns, and consistently beat analysts' earnings forecasts. Second, they have a lower risk of financial distress; in particular, they have a lower probability of bankruptcy as measured by Altman's z-score, and their returns have a smaller loading on the Fama-French HML factor. Third, they engage in less earnings manipulation as measured by fewer negative income restatements and lower accounting accruals. This evidence indicates not only that board experience has positive marginal monitoring (and possibly advisory) value, but also that both firms and the market fail to recognize this potential value. These results are robust to the use of OLS with firm-level fixed effects and Instrumental Variables using lag transformations as instruments, which, to varying degrees help alleviate concerns that they are driven by unobserved firm heterogeneity, selection bias, and/or measurement error.
The second chapter (co-authored with Markus Brunnermeier and Jonathan Parker), entitled "An Economic Model of the Planning Fallacy," focuses on the phenomenon that people tend to underestimate the work involved in completing tasks and consequently finish tasks later than expected or do an inordinate amount of work right before projects are due. We present a theory in which people procrastinate because the ex ante utility benefits of anticipating that a task will be easy to complete outweigh the average ex post costs of poor planning. We show that, given a commitment device, people self-impose deadlines that are binding but require less smoothing of work than that chosen by a person with objective beliefs. We test our theory using extant experimental evidence on differences in expectations and behavior. We find that reported beliefs and behavior generally respond as our theory predicts. For example, monetary incentives for accurate prediction ameliorate the planning fallacy while incentives for rapid completion aggravate it.
The third chapter (co-authored with Marc Martos-Vila), entitled "Empirical Evidence on the Search for Corporate Control," is an empirical study on the existence of search frictions and the importance of golden-parachute provisions in the market for corporate control. To construct our proxy for search costs, we use data on firms' boards of directors to construct a network such that links between two individuals indicate that they currently serve on the same board, and we proxy search costs with the board's degree of connectedness. Using data from 1990 to 2006, we find that firms are more likely to be acquirers (targets) when there are more firms available (looking) to buy, search costs are low (high), and a golden parachute is not (is) provided to the firm's manager. These findings are largely consistent with predictions from the recent theoretical literature that models the decision of firms to actively search for potential targets in a search-with-frictions setting. We alleviate concerns that these results are driven by firm heterogeneity or selection bias, by showing that they are robust to the use of OLS with firm-level fixed effects and Instrumental Variables using CEO salary and lagged board connectedness as instruments for the existence of golden-parachute provisions and connectedness, respectively.