Manager Personal Traits and Financial Decisions
The ultimate goal for economic agents who are in managing roles is to maximize their shareholders’ values. As managers, they are expected to make value-enhancing decisions based on their professional knowledge and skills. However, economic agents’ decisions are heavily influenced by their preferences, which are often related to their personal characteristics. Therefore, studying manager personal traits could significantly extend our understanding about their decisions. In my dissertation, I try to understand how two specific aspects of managers’ personal traits – personal social networks and political ideology – affect their professional financial decisions and the associated benefits and costs to their shareholders. My dissertation has two major parts and three essays. In the first part, I study the impacts of managers’ personal networks established through their professional and social experiences. In the first essay, I explore the information channel established through networks between firms’ CFOs and bankers. I show that this information channel can help firms with such connected CFOs to break the information asymmetry barriers and eventually achieve a less costly capital structure. In the second essay, I study how friendliness among connected top executives and directors can help their firms alleviate the costs associated with complying with stricter regulations (i.e., the stricter requirements on board independence in the post Sarbanes-Oxley Act era). In the second part, I test how managers’ political ideology affects their professional decisions. Particularly, I investigate whether mutual fund managers are more likely to invest in firms running by executives with similar political ideologies. I also explore whether this bias among mutual fund managers are beneficial or detrimental to their fund shareholders. The first essay is titled as Cash and Connections: The Importance of CFO Networks. In this paper, I present evidence that firms with Chief Financial Officers (CFOs) who have connections to bankers tend to hold less cash. CFO–banker connections reduce information asymmetry between firms and banks and thus reduce firms’ need for precautionary cash. In addition, CFO connections to bankers are more important for cash holdings than CEOs’ connections. Additional analysis suggests that investors recognize the value of CFO–banker connections and, accordingly, assign a lower stock market valuation to cash holdings of firms that have CFOs with these connections. These results are robust to various tests dealing with endogeneity concerns, including a test based on a sample of exogenous CFO changes. The second essay is titled as What can Your Friends do for You? CEO Networks and the Cost of Regulatory Compliance. In this paper, we present evidence that, following the passage of the Sarbanes-Oxley Act, firms responded to the increased requirement for outside director monitoring by substituting insiders with outside directors who have social or professional connections to their CEOs. This substitution was most significant in firms that have higher outside director monitoring costs – small, young firms, firms outside the S&P 1500 index, and firms with low analyst scrutiny. The addition of these “friendly” directors did not reduce firm performance, suggesting that it was an efficient response that firms tried to lower the additional monitoring costs imposed by the new regulations. The third essay is titled as Political Partisan Bias in Mutual Fund Portfolios. In this paper, we present evidence that mutual fund managers are more likely to allocate assets to firms managed by executives and directors with whom they share a similar political partisan affiliation. We find that this bias is not associated with improved fund performance, suggesting that it is not due to superior information. Funds with more partisan bias suffer from higher levels of idiosyncratic volatility than those with less bias. Partisan bias is more evident when fund managers are less experienced, in firms with more opaque information environments, and when the President of the U.S. comes from fund managers’ own party. These findings indicate that political partisan bias among fund managers are due to in-group favoritism.
Finance, Board Structure, Cash Holding, Manager Personal Traits, Mutual Fund Investment, Political Ideology, Social Networks
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