Gennaro Bernile

What Doesn't Kill You Will Only Make You More Risk-Loving: Early-Life Disasters and CEO Behavior

The literature on managerial style posits a linear relation between a CEO’s past experiences and firm risk. We show that there is a non-monotonic relation between the intensity of CEOs’ early-life exposure to fatal disasters and corporate risk-taking. CEOs who experience fatal disasters without extremely negative consequences lead firms that behave more aggressively, whereas CEOs who witness the extreme downside of disasters behave more conservatively. These patterns manifest across various corporate policies including leverage, cash holdings, and acquisition activity. Ultimately, the link between CEOs’ disaster experience and corporate policies has real economic consequences on firm riskiness and cost of capital.

Local Business Cycles and Local Liquidity

This study examines whether state-level economic conditions affect the liquidity of local firms. We find that liquidity levels of local stocks are higher (lower) when the local economy has performed well (poorly). This relation is stronger when local financing constraints are more binding, the local information environment is more opaque, and local institutional ownership levels and trading intensity are higher. Overall the evidence supports the notion that the geographical segmentation of U.S. capital markets generates predictable patterns in local liquidity.

Geography of Firms and Propagation of Local Economic Shocks

We use information from 10-K filings to identify economic connections among U.S. states. These connections provide a measure of economic distance that does not merely reflect physical proximity or industry connections. At the firm level, there is excess comovement in the returns and liquidity of firms headquartered in economically connected states. At the aggregate level, the economic connections create spillover effects whereby economic shocks in a state affect its connected states and the U.S. economy. For example, a one percent production shock in California (Texas) is related to a 6.71 (5.62) percent change in annual U.S. GDP growth, relative to the average GDP growth. Collectively, the network of publicly-traded firms generates a channel that facilitates the propagation of local shocks across the U.S. economy.

Board Diversity, Firm Risk, and Corporate Policies

We examine the effects of diversity in the board of directors on corporate policies and risk. Using a multidimensional measure, we find that greater board diversity leads to lower volatility and better performance. The lower risk levels are largely due to diverse boards adopting more persistent and less risky financial policies. However, consistent with diversity fostering more efficient (real) risk-taking, firms with greater board diversity also invest persistently more in research and development (R&D) and have more efficient innovation processes. Instrumental variable tests that exploit exogenous variation in firm access to the supply of diverse nonlocal directors indicate that these relations are causal.

Are the Risk Attitudes of Professional Investors Affected by Personal Catastrophic Experiences

We adopt a novel empirical approach to show that the risk attitudes of professional investors are affected by their catastrophic experiences – even for catastrophes with no economic impact on these investors or their portfolio firms. We study the portfolio risk of U.S.-based mutual funds that invest outside the U.S. before and after fund managers personally experience severe natural disasters. Using differences-in-differences, we compare managers in disaster versus non-disaster counties matched on prior disaster probability and fund characteristics. We find that monthly fund return volatility decreases by roughly 60 bps in year 1 and the effect disappears by year 3. Systematic risk drives the results. Additional analyses rule out wealth effects (using disasters with no damages) and managerial agency, skill, and catering explanations.

Learning to Negotiate Takeovers? The Role of Target CEO Experience

Does a CEO’s experience with mergers matter when her firm becomes a takeover target? We find that shareholders receive higher premiums when their CEO has experience. The evidence suggests this is due to learning rather than innate skills or selection. Consistent with superior negotiation of salient features of takeover offers, experienced target CEOs obtain either safer cash payments or higher premiums as the fraction of cash in the offer decreases. These benefits do not come at the cost of other contractual concessions or inefficiencies in takeover negotiations. Overall, M&A experience is valuable when the CEO’s firm becomes a takeover target.

Information Environment and the Geography of Firms and Investors

We develop a model linking stock ownership and returns to the distribution of private information and quality of public information. Supporting the model, we find that the firm’s information environment affects investors’ propensity to hold and trade its stocks, but its effects hinge on investors’ access to private information. Nearby investors with potential access decrease their holdings when private information becomes more dispersed and public information quality improves, whereas distant investors display opposite patterns. Tests exploiting exogenous shocks to firms’ information environments indicate these relations are causal. Moreover, firms’ information environments and proximity to potential investors jointly explain stock returns.