Yihui Pan

The Determinants and Impact of Executive-Firm Matches

I estimate a model of executive-firm matching, in which both components of the executive labor market outcome -- the assignment of managers to firms and the cross-sectional distribution of executive pay -- are endogenously determined. Results in this paper reveal the importance of match specificity in productivity, driven by complementarities between firm and manager attributes. Therefore, one reason that larger, more diversified, research-intensive firms pay their executives more is because they are assortatively matched with managers that are talented, have more cross-industry experience, and are prone to innovation. More important, they outbid competing firms for these managers because they enjoy higher marginal productivity from given managerial skills. Announcement abnormal returns and executive tenure duration are both higher for matches with higher estimated productivity, suggesting mutual benefits for both the firms and the managers from assortative matching.

CEO Investment Cycles

This paper documents the existence of a CEO Investment Cycle, in which disinvestment decreases over CEO tenure while investment increases, leading to “cyclical�? firm growth in assets as well as in employment. The estimated variation in investment rate over the CEO cycle is of the same order of magnitude as the differences caused by business cycles or financial constraints. This investment cycle appears to reflect CEOs’ preference for investment growth, which leads to increasing investment quantity and decreasing investment quality over time as the CEO gains more control over his board.

CEO Investment cycles

This paper documents the existence of a CEO investment cycle, in which disinvestment decreases over a CEOs tenure, while investment increases, leading to “cyclical” firm growth in assets and employment. The estimated variation in investment rate over the CEO investment cycle is of the same order of magnitude as the differences caused by business cycles or financial constraints. Results from a number of tests generally support the view that the investment cycle is caused by agency problems, leading to increasing investment quantity and decreasing investment quality over time as the CEO gains more control over his board.Received February 17, 2015; accepted October 1, 2015 by Editor David Denis.

First Year in Office: How Do New CEOS Create Value?

Career concerns and possible “escalation of commitment” bias imply that replacing key decision makers is often necessary for effective re-optimization on poor prior investment decisions. Thus, examining firm actions immediately post CEO turnover can shed important light on the error correction process in a corporation. We find that the probability that a poorly performing business segment will be terminated almost doubles when the CEO who established it steps down. More generally, corrective actions such as operational downsizing tend to follow CEO turnover, while expansion and other corporate policy changes do not. Management shakeup greatly facilitates the correction process, especially after CEO turnover. The higher intensity of corrective actions and their positive value impact post CEO turnover hold pervasively, whether the pre-turnover firm and industry conditions are good or bad, and even for turnovers due to the death and retirement of the department CEOs. The intensity and value impact of post-turnover corrective actions can also explain the well documented performance difference between new insider and outsider CEOs. Our study suggests that a main source of value creation associated with CEO turnover is the facilitation of error correction and re-optimization. We also identify institutional frictions that can hinder error correction at CEO turnover.

Does Uncertainty About Management Affect Firms' Costs of Borrowing?

Uncertainty about management appears to affect firms’ cost of borrowing and financial policies. In a sample of S&P 1500 firms between 1987 and 2010, CDS spreads, loan spreads and bond yield spreads all decline over the first three years of CEO tenure, holding other macroeconomic, firm, and security level factors constant. This decline occurs regardless of the reason for the prior CEO’s departure. Similar but smaller declines occur following turnovers of CFOs. The spreads are more sensitive to CEO tenure when the prior uncertainty about the CEO’s ability is likely to be higher: when he is not an heir apparent, is an outsider, is younger, and when he does not have a prior relationship with the lender. The spread- tenure sensitivity is also higher when the firm has a higher default risk and when the debt claim is riskier. These patterns are consistent with the view that the decline in spreads in a manager’s first three years of tenure reflects the resolution of uncertainty about management. Firms adjust their propensities to issue external debt, precautionary cash holding, and reliance on internal funds in response to these short-term increases in borrowing costs early in their CEOs’ tenure.