Podcast
Questions and Answers
True or false: The payout of cash to shareholders creates a major agency problem between shareholders and managers of the firm.
True or false: The payout of cash to shareholders creates a major agency problem between shareholders and managers of the firm.
True (A)
True or false: Free cash flow is cash flow in excess of that required to fund all projects that have positive net present values.
True or false: Free cash flow is cash flow in excess of that required to fund all projects that have positive net present values.
True (A)
True or false: Managers are reluctant to payout cash because it reduces their power.
True or false: Managers are reluctant to payout cash because it reduces their power.
True (A)
True or false: Conflicts of interest between shareholders and managers over payout policies are especially severe when the firm generates substantial free cash flow.
True or false: Conflicts of interest between shareholders and managers over payout policies are especially severe when the firm generates substantial free cash flow.
Free cash flow problem should be more severe when agency problems are severe
Free cash flow problem should be more severe when agency problems are severe
Market value of cash may be higher than its book value
Market value of cash may be higher than its book value
Firms may be reluctant to pay cash dividends
Firms may be reluctant to pay cash dividends
More stringent governance reduces the free cash flow problem
More stringent governance reduces the free cash flow problem
Managers of firms with large free cash flows are more likely to undertake value-destroying M&As
Managers of firms with large free cash flows are more likely to undertake value-destroying M&As
Empire building stems from differences in preferences between investors and executives
Empire building stems from differences in preferences between investors and executives
Empire building is less likely if managers are less accountable to the firm’s investors
Empire building is less likely if managers are less accountable to the firm’s investors
Financial reporting is not an important means of monitoring managers to make them more accountable
Financial reporting is not an important means of monitoring managers to make them more accountable
Unwarranted growth together with reduced profitability is a good sign for owners
Unwarranted growth together with reduced profitability is a good sign for owners
Many studies show how managerial traits do not affect various corporate decisions and key business outcomes
Many studies show how managerial traits do not affect various corporate decisions and key business outcomes
Corporate governance problem does not affect managerial traits and corporate decisions
Corporate governance problem does not affect managerial traits and corporate decisions
Firms may use excess cash to unprofitable acquisitions
Firms may use excess cash to unprofitable acquisitions
Managers' personal traits do not have any impact on their decision-making process.
Managers' personal traits do not have any impact on their decision-making process.
Altman's model and Ohlson's model use financial ratios to predict future financial distress of a firm.
Altman's model and Ohlson's model use financial ratios to predict future financial distress of a firm.
Liquidity and working capital are weak signals of anticipated distress according to traditional distress prediction models.
Liquidity and working capital are weak signals of anticipated distress according to traditional distress prediction models.
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress.
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress.
Defaulting CEOs and directors have no significant difference in proportion between distress and non-distress firms.
Defaulting CEOs and directors have no significant difference in proportion between distress and non-distress firms.
Theoretical reasoning is based on literatures related to managerial traits and financial distress.
Theoretical reasoning is based on literatures related to managerial traits and financial distress.
Managers' personal credit defaults reflect the same personal traits that affect corporate decisions, which may lead a firm into financial distress.
Managers' personal credit defaults reflect the same personal traits that affect corporate decisions, which may lead a firm into financial distress.
Overconfidence, optimism, the illusion of control, and sensation-seeking affect consumption attitudes and resulting saving and borrowing decisions.
Overconfidence, optimism, the illusion of control, and sensation-seeking affect consumption attitudes and resulting saving and borrowing decisions.
Managers' personal traits play an important role in key managerial decisions such as capital structure, investment, and M&A decisions.
Managers' personal traits play an important role in key managerial decisions such as capital structure, investment, and M&A decisions.
CEO overconfidence has no impact on the market's reaction to acquisitions.
CEO overconfidence has no impact on the market's reaction to acquisitions.
Upper echelons theory suggests that the organization reflects its top managers.
Upper echelons theory suggests that the organization reflects its top managers.
Agency costs of free cash flow, corporate finance, and takeovers are not related to managerial traits.
Agency costs of free cash flow, corporate finance, and takeovers are not related to managerial traits.
Overconfident managers tend to underestimate their ability to generate returns in mergers and acquisitions (M&As), leading to overpayment for target companies and value-destroying mergers.
Overconfident managers tend to underestimate their ability to generate returns in mergers and acquisitions (M&As), leading to overpayment for target companies and value-destroying mergers.
Malmendier and Tate (2008) use CEO's personal over-investment in the firm and press portrayals as measures of CEO overconfidence.
Malmendier and Tate (2008) use CEO's personal over-investment in the firm and press portrayals as measures of CEO overconfidence.
Overconfident CEOs are less likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
Overconfident CEOs are less likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
The stock market reaction at merger announcements for overconfident CEOs is significantly more positive than for non-overconfident CEOs.
The stock market reaction at merger announcements for overconfident CEOs is significantly more positive than for non-overconfident CEOs.
Appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.
Appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.
The Hubris Hypothesis of M&As suggests that managers in acquiring firms may pay too much for their targets due to valuation errors.
The Hubris Hypothesis of M&As suggests that managers in acquiring firms may pay too much for their targets due to valuation errors.
Roll's steps in the M&A process include identifying a potential target, undertaking a valuation, and comparing the value to the current market price.
Roll's steps in the M&A process include identifying a potential target, undertaking a valuation, and comparing the value to the current market price.
Sensation-seeking managers may take risks for the thrill rather than the expected utility, which can impact their decision-making.
Sensation-seeking managers may take risks for the thrill rather than the expected utility, which can impact their decision-making.
Managerial experiences, values, and cognitive styles have no impact on corporate decisions and are not considered in corporate governance.
Managerial experiences, values, and cognitive styles have no impact on corporate decisions and are not considered in corporate governance.
True or false: The payout of cash to shareholders creates a major agency problem between shareholders and managers of the firm.
True or false: The payout of cash to shareholders creates a major agency problem between shareholders and managers of the firm.
True or false: Free cash flow is cash flow in excess of that required to fund all projects that have positive net present values.
True or false: Free cash flow is cash flow in excess of that required to fund all projects that have positive net present values.
True or false: Conflicts of interest between shareholders and managers over payout policies are especially severe when the firm generates substantial free cash flow.
True or false: Conflicts of interest between shareholders and managers over payout policies are especially severe when the firm generates substantial free cash flow.
True or false: Managers are reluctant to payout cash because it reduces their power.
True or false: Managers are reluctant to payout cash because it reduces their power.
Managers' personal credit defaults reflect the same personal traits that affect corporate decisions, which may lead a firm into financial distress
Managers' personal credit defaults reflect the same personal traits that affect corporate decisions, which may lead a firm into financial distress
Traditional distress prediction models use financial ratios that are likely to predict future financial distress of the firm
Traditional distress prediction models use financial ratios that are likely to predict future financial distress of the firm
Profitability is a strong signal of anticipated distress according to traditional distress prediction models
Profitability is a strong signal of anticipated distress according to traditional distress prediction models
Liquidity and working capital are strong signals of anticipated distress according to traditional distress prediction models
Liquidity and working capital are strong signals of anticipated distress according to traditional distress prediction models
Defaulting CEOs and directors have no significant difference in proportion between distress and non-distress firms
Defaulting CEOs and directors have no significant difference in proportion between distress and non-distress firms
CEO personal and corporate leverage show behavioral consistency in corporate finance
CEO personal and corporate leverage show behavioral consistency in corporate finance
CEO overconfidence has been found to affect corporate policies
CEO overconfidence has been found to affect corporate policies
Managers' personal traits play an important role in key managerial decisions such as capital structure, investment, and M&A decisions
Managers' personal traits play an important role in key managerial decisions such as capital structure, investment, and M&A decisions
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress
Agency costs of free cash flow, corporate finance, and takeovers are not related to managerial traits
Agency costs of free cash flow, corporate finance, and takeovers are not related to managerial traits
Managers of firms with large free cash flows are more likely to undertake value-destroying M&As
Managers of firms with large free cash flows are more likely to undertake value-destroying M&As
Overconfidence, optimism, the illusion of control, and sensation-seeking affect consumption attitudes and resulting saving and borrowing decisions
Overconfidence, optimism, the illusion of control, and sensation-seeking affect consumption attitudes and resulting saving and borrowing decisions
Managers' personal wealth invested in a firm does not influence the value of free cash flow according to Zerni, Kallunki and Nilsson (2011)
Managers' personal wealth invested in a firm does not influence the value of free cash flow according to Zerni, Kallunki and Nilsson (2011)
Zerni, Kallunki and Nilsson (2011) found that dividend pay-out ratios increase with the portion of personal wealth that board members and main owners have invested in a firm
Zerni, Kallunki and Nilsson (2011) found that dividend pay-out ratios increase with the portion of personal wealth that board members and main owners have invested in a firm
The free cash flow problem predicts that mergers and acquisitions motivated by diversification of business operations are less likely to involve resource waste
The free cash flow problem predicts that mergers and acquisitions motivated by diversification of business operations are less likely to involve resource waste
Empire building is more likely when managers are more accountable to the firm's investors
Empire building is more likely when managers are more accountable to the firm's investors
Managers' behavioral biases do not affect various corporate decisions according to many studies
Managers' behavioral biases do not affect various corporate decisions according to many studies
Unwarranted growth together with reduced profitability is a good sign for owners according to the text
Unwarranted growth together with reduced profitability is a good sign for owners according to the text
Managers' personal traits do not have any impact on their decision-making process according to the text
Managers' personal traits do not have any impact on their decision-making process according to the text
Financial reporting is an important means of monitoring managers to make them more accountable according to the text
Financial reporting is an important means of monitoring managers to make them more accountable according to the text
Managers of firms with large free cash flows are more likely to undertake value-destroying M&As according to the text
Managers of firms with large free cash flows are more likely to undertake value-destroying M&As according to the text
More stringent governance reduces the free cash flow problem according to the text
More stringent governance reduces the free cash flow problem according to the text
Free cash flow problem should be less severe when agency problems are severe according to the text
Free cash flow problem should be less severe when agency problems are severe according to the text
Market value of cash may be higher than its book value according to the text
Market value of cash may be higher than its book value according to the text
Managers' overconfidence can lead to overpayment for target companies and value-destroying mergers.
Managers' overconfidence can lead to overpayment for target companies and value-destroying mergers.
Malmendier and Tate (2008) use CEO's personal over-investment in the firm and press portrayals as measures of CEO overconfidence.
Malmendier and Tate (2008) use CEO's personal over-investment in the firm and press portrayals as measures of CEO overconfidence.
Overconfident CEOs are more likely to make an acquisition, especially if the merger is diversifying and does not require external financing.
Overconfident CEOs are more likely to make an acquisition, especially if the merger is diversifying and does not require external financing.
The stock market reaction at merger announcements for overconfident CEOs is significantly more positive than for non-overconfident CEOs.
The stock market reaction at merger announcements for overconfident CEOs is significantly more positive than for non-overconfident CEOs.
There is a positive relation between CEOs' personal home leverage and corporate leverage.
There is a positive relation between CEOs' personal home leverage and corporate leverage.
Appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.
Appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.
Roll's steps in the M&A process include identifying a potential target, undertaking a valuation, and comparing the value to the current market price.
Roll's steps in the M&A process include identifying a potential target, undertaking a valuation, and comparing the value to the current market price.
Sensation-seeking managers may take risks for the thrill rather than the expected utility, which can impact their decision-making.
Sensation-seeking managers may take risks for the thrill rather than the expected utility, which can impact their decision-making.
Managers' personal traits, such as honesty and cognitive styles, do not need to be matched with their tasks to mitigate the agency problem.
Managers' personal traits, such as honesty and cognitive styles, do not need to be matched with their tasks to mitigate the agency problem.
Managerial experiences, values, and cognitive styles have no impact on corporate decisions and are not considered in corporate governance.
Managerial experiences, values, and cognitive styles have no impact on corporate decisions and are not considered in corporate governance.
Overconfident CEOs are less likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
Overconfident CEOs are less likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
The Hubris Hypothesis of M&As suggests that managers in acquiring firms may pay too much for their targets due to valuation errors.
The Hubris Hypothesis of M&As suggests that managers in acquiring firms may pay too much for their targets due to valuation errors.
Managers are generally eager to payout cash to shareholders because it reduces their power.
Managers are generally eager to payout cash to shareholders because it reduces their power.
Free cash flow is cash flow in excess of that required to fund all projects that have positive net present values.
Free cash flow is cash flow in excess of that required to fund all projects that have positive net present values.
Conflicts of interest between shareholders and managers over payout policies are especially severe when the firm generates substantial free cash flow.
Conflicts of interest between shareholders and managers over payout policies are especially severe when the firm generates substantial free cash flow.
More stringent governance reduces the free cash flow problem according to the text.
More stringent governance reduces the free cash flow problem according to the text.
Managers with large free cash flows are less likely to undertake value-destroying M&As according to the text.
Managers with large free cash flows are less likely to undertake value-destroying M&As according to the text.
Managers may be reluctant to pay high dividends according to the text.
Managers may be reluctant to pay high dividends according to the text.
The free cash flow problem predicts that managers of firms with large free cash flows and unused borrowing power are more likely to undertake low-benefit or even value-destroying M&As.
The free cash flow problem predicts that managers of firms with large free cash flows and unused borrowing power are more likely to undertake low-benefit or even value-destroying M&As.
Empire building is more likely if managers are more accountable to the firm’s investors according to the text.
Empire building is more likely if managers are more accountable to the firm’s investors according to the text.
Financial reporting is not an important means of monitoring managers to make them more accountable according to the text.
Financial reporting is not an important means of monitoring managers to make them more accountable according to the text.
Managers' behavioral biases do not affect various corporate decisions according to the text.
Managers' behavioral biases do not affect various corporate decisions according to the text.
The value of free cash flow increases with the portion of personal wealth that board members have invested in a firm according to Zerni, Kallunki and Nilsson (2011).
The value of free cash flow increases with the portion of personal wealth that board members have invested in a firm according to Zerni, Kallunki and Nilsson (2011).
Managers' personal traits, such as honesty and cognitive styles, do not have an impact on corporate decisions and are not considered in corporate governance according to the text.
Managers' personal traits, such as honesty and cognitive styles, do not have an impact on corporate decisions and are not considered in corporate governance according to the text.
Managers are reluctant to payout cash because it reduces their power according to the text.
Managers are reluctant to payout cash because it reduces their power according to the text.
Unwarranted growth together with reduced profitability is a good sign for owners according to the text.
Unwarranted growth together with reduced profitability is a good sign for owners according to the text.
Market value of cash may be higher than its book value according to the text.
Market value of cash may be higher than its book value according to the text.
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress according to the text.
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress according to the text.
Managers' personal traits, such as honesty and cognitive styles, do not need to be matched with their tasks to mitigate the agency problem.
Managers' personal traits, such as honesty and cognitive styles, do not need to be matched with their tasks to mitigate the agency problem.
Managers of firms with large free cash flows are more likely to undertake value-destroying M&As according to the text
Managers of firms with large free cash flows are more likely to undertake value-destroying M&As according to the text
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress.
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress.
Defaulting CEOs and directors have no significant difference in proportion between distress and non-distress firms.
Defaulting CEOs and directors have no significant difference in proportion between distress and non-distress firms.
Market value of cash may be higher than its book value according to the text
Market value of cash may be higher than its book value according to the text
Empire building is less likely if managers are less accountable to the firm’s investors.
Empire building is less likely if managers are less accountable to the firm’s investors.
Unwarranted growth together with reduced profitability is a good sign for owners according to the text
Unwarranted growth together with reduced profitability is a good sign for owners according to the text
CEO personal and corporate leverage show behavioral consistency in corporate finance.
CEO personal and corporate leverage show behavioral consistency in corporate finance.
More stringent governance reduces the free cash flow problem according to the text
More stringent governance reduces the free cash flow problem according to the text
The free cash flow problem predicts that mergers and acquisitions motivated by diversification of business operations are less likely to involve resource waste.
The free cash flow problem predicts that mergers and acquisitions motivated by diversification of business operations are less likely to involve resource waste.
Managers' behavioral biases do not affect various corporate decisions according to many studies
Managers' behavioral biases do not affect various corporate decisions according to many studies
Altman's model and Ohlson's model use financial ratios to predict future financial distress of a firm.
Altman's model and Ohlson's model use financial ratios to predict future financial distress of a firm.
Managers' personal credit defaults reflect the same personal traits that affect corporate decisions, which may lead a firm into financial distress.
Managers' personal credit defaults reflect the same personal traits that affect corporate decisions, which may lead a firm into financial distress.
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress.
Adding managers' credit default information to distress prediction models does not provide any incremental role in predicting financial distress.
Defaulting CEOs and directors have a significant difference in proportion between distress and non-distress firms.
Defaulting CEOs and directors have a significant difference in proportion between distress and non-distress firms.
Theoretical reasoning is based on literatures related to managerial traits and financial distress.
Theoretical reasoning is based on literatures related to managerial traits and financial distress.
Overconfident CEOs are more likely to make an acquisition, especially if the merger is diversifying and does not require external financing.
Overconfident CEOs are more likely to make an acquisition, especially if the merger is diversifying and does not require external financing.
Market value of cash may be higher than its book value according to the text.
Market value of cash may be higher than its book value according to the text.
Many studies show how managerial traits do not affect various corporate decisions and key business outcomes.
Many studies show how managerial traits do not affect various corporate decisions and key business outcomes.
Unwarranted growth together with reduced profitability is a good sign for owners according to the text.
Unwarranted growth together with reduced profitability is a good sign for owners according to the text.
Overconfident CEOs are less likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
Overconfident CEOs are less likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
Managers' personal traits, such as honesty and cognitive styles, do not need to be matched with their tasks to mitigate the agency problem.
Managers' personal traits, such as honesty and cognitive styles, do not need to be matched with their tasks to mitigate the agency problem.
Zerni, Kallunki and Nilsson (2011) found that dividend pay-out ratios increase with the portion of personal wealth that board members and main owners have invested in a firm.
Zerni, Kallunki and Nilsson (2011) found that dividend pay-out ratios increase with the portion of personal wealth that board members and main owners have invested in a firm.
Agency costs of free cash flow, corporate finance, and takeovers are not related to managerial traits.
Agency costs of free cash flow, corporate finance, and takeovers are not related to managerial traits.
Study Notes
Managerial Traits and Corporate Decision-Making
- Behavioral biases of managers, such as overconfidence and sensation seeking, can significantly impact corporate decision-making.
- Overconfident managers tend to overestimate their ability to generate returns in mergers and acquisitions (M&As), leading to overpayment for target companies and value-destroying mergers.
- Malmendier and Tate (2008) use CEO's personal over-investment in the firm and press portrayals as measures of CEO overconfidence.
- Overconfident CEOs are 65% more likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
- The stock market reaction at merger announcements for overconfident CEOs is significantly more negative than for non-overconfident CEOs.
- Overconfident CEOs use more debt and issue new debt more often, and there is a positive relation between CEOs' personal home leverage and corporate leverage.
- Appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.
- The Hubris Hypothesis of M&As suggests that managers in acquiring firms may pay too much for their targets due to valuation errors.
- Roll's steps in the M&A process include identifying a potential target, undertaking a valuation, and comparing the value to the current market price.
- Managers' personal traits, such as honesty and cognitive styles, need to be matched with their tasks to mitigate the agency problem.
- Sensation-seeking managers may take risks for the thrill rather than the expected utility, which can impact their decision-making.
- Managerial experiences, values, and cognitive styles can affect corporate decisions and need to be considered in corporate governance.
Managerial Traits and Corporate Decision-Making
- Behavioral biases of managers, such as overconfidence and sensation seeking, can significantly impact corporate decision-making.
- Overconfident managers tend to overestimate their ability to generate returns in mergers and acquisitions (M&As), leading to overpayment for target companies and value-destroying mergers.
- Malmendier and Tate (2008) use CEO's personal over-investment in the firm and press portrayals as measures of CEO overconfidence.
- Overconfident CEOs are 65% more likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
- The stock market reaction at merger announcements for overconfident CEOs is significantly more negative than for non-overconfident CEOs.
- Overconfident CEOs use more debt and issue new debt more often, and there is a positive relation between CEOs' personal home leverage and corporate leverage.
- Appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.
- The Hubris Hypothesis of M&As suggests that managers in acquiring firms may pay too much for their targets due to valuation errors.
- Roll's steps in the M&A process include identifying a potential target, undertaking a valuation, and comparing the value to the current market price.
- Managers' personal traits, such as honesty and cognitive styles, need to be matched with their tasks to mitigate the agency problem.
- Sensation-seeking managers may take risks for the thrill rather than the expected utility, which can impact their decision-making.
- Managerial experiences, values, and cognitive styles can affect corporate decisions and need to be considered in corporate governance.
Managerial Traits and Corporate Decision-Making
- Behavioral biases of managers, such as overconfidence and sensation seeking, can significantly impact corporate decision-making.
- Overconfident managers tend to overestimate their ability to generate returns in mergers and acquisitions (M&As), leading to overpayment for target companies and value-destroying mergers.
- Malmendier and Tate (2008) use CEO's personal over-investment in the firm and press portrayals as measures of CEO overconfidence.
- Overconfident CEOs are 65% more likely to make an acquisition, particularly if the merger is diversifying and does not require external financing.
- The stock market reaction at merger announcements for overconfident CEOs is significantly more negative than for non-overconfident CEOs.
- Overconfident CEOs use more debt and issue new debt more often, and there is a positive relation between CEOs' personal home leverage and corporate leverage.
- Appointing CEOs and directors with past personal payment default entries increases the likelihood of financial distress of the firm.
- The Hubris Hypothesis of M&As suggests that managers in acquiring firms may pay too much for their targets due to valuation errors.
- Roll's steps in the M&A process include identifying a potential target, undertaking a valuation, and comparing the value to the current market price.
- Managers' personal traits, such as honesty and cognitive styles, need to be matched with their tasks to mitigate the agency problem.
- Sensation-seeking managers may take risks for the thrill rather than the expected utility, which can impact their decision-making.
- Managerial experiences, values, and cognitive styles can affect corporate decisions and need to be considered in corporate governance.
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Test your knowledge of managerial traits and their impact on corporate decision-making with this quiz. Explore the behavioral biases of overconfident and sensation-seeking managers, their influence on mergers and acquisitions, and the potential consequences for corporate governance and financial distress.
