Working Papers
6- On a Spending Spree: The Real Effects of Heuristics in Managerial Budgets (October 2022), with Denis Sosyura
[SSRN Version]
Top figure shows the share of firms' budget spent over the fiscal year when managers run a budget surplus at the end of the fiscal year. Below figures respectively show the share of firms' budget spent over the fiscal year when managers' budgets run short or when they are fully depleted by the end of the fiscal year.
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Using micro data on managerial expenditures, we uncover heuristics in capital budgets, such as nominal rigidity, anchoring, and sharp reset deadlines. Such heuristics engender managerial opportunism and erode investment efficiency. Managers with a budget surplus increase investment sharply before budget deadlines, and such investments yield lower sales, weaker margins, and more negative NPV projects. Managers who reach a budget constraint early in the fiscal cycle halt further spending until their budget is reset, irrespective of investment options. These effects are stronger at firms with more hierarchical layers and a greater subordinates-to-executives ratio. Overall, simplifying budgeting rules engender strategic behavior and wasteful spending.
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5- Strategic Learning and Corporate Investment (August 2022), with Michael Wittry - R&R at The Journal of Finance
[SSRN Version]
This graph plots the relationship between the historical number of landowners and the number of peers’ options by township averaged for each interval. The dotted line presents the fitted relation. The histogram shows the distribution of the number of historical landowners for each interval.
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We show that firms anticipate information spillover from peers' investment decisions and delay project exercise to learn from them. While this information improves project selection, the cost of waiting erodes these gains. To establish causality, we exploit local exogenous variation from the 1800s that shapes the number of peers that a firm can learn from today. The effect is most salient when information is scarce, costs of waiting are low, projects have low expected profitability, and the source information is more relevant. Finally, the anticipation of spillovers dampens aggregate investment, suggesting a role for this mechanism in macro-investment models.
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4- Capital Budgeting and Idiosyncratic Risk (June 2021) [New Draft Coming Soon] - R&R at The Journal of Finance
[SSRN Version]
1. Best paper at the 2019 FRA Conference in Las Vegas
2. Best Ph.D. paper at the 2019 FRA Conference in Las Vegas
3. Cubist Systematic Strategies Ph.D. Candidate Award at the 2020 WFA Conference in San Francisco
This figure contrasts the projects' production forecast rate of decline with the realized production rate of decline of the median gas well, and the 10th and 90th percentile.
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Using an NPV-based revealed-preference strategy, I find that idiosyncratic risk affects the discount rate that firms use in their capital budgeting decisions. I exploit quasi-exogenous within-region variation in project-specific idiosyncratic risk and find that firms inflate their discount rate in response to an increase in project-specific idiosyncratic risk. Moreover, these discount rate adjustments are negatively associated with measures of firm profitability and investment decision. I then explore how proxies for costly external financing and firm-level idiosyncratic risk diversification relate to discount rate adjustments. Consistent with theoretical predictions, firms appear to adjust their discount rate to account for both frictions.
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3- Self-Dealing in Corporate Investment (October 2022), with Denis Sosyura
* This paper previously circulated under the title CEO Pet Projects.
[SSRN Version]
1. Best paper at the 2021 Raj & Kamla Gupta Governance Institute Conference (Drexel University)
2. Top paper at the 2021 Global Finance Conference
3. Best Paper at the 2021 International Corporate Governance Society Conference
This figure represents a property included in our sample and the associated drilling activity in its vicinity. The yellow region indicates the location of the property as indicated on google map. The property in the figure spans roughly 95.65 acres (i.e., 0.4 km squared). Each red dot on the figure represents a distinct oil and gas well drilled during the sample period 2000 and 2020.
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Using hand-collected data on CEOs’ personal assets, we find that CEOs prioritize corporate investment projects that increase the value of CEOs’ private assets. Such projects are implemented sooner, receive more capital, and are less likely to be dropped. This investment strategy delivers large personal gains to the CEO but selects lower NPV projects for the firm and erodes its investment efficiency. CEO self-dealing is driven by public firms and disappears at smaller private firms where the agent is the principal. Departures of self-dealing CEOs increase firm value by 5–7%. Overall, we uncover CEOs’ private gains in capital budgeting.
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2- Discount Rate Uncertainty and Capital Investment (December 2021), with Hendrik Bessembinder
[SSRN Version]
This figure plots the relation between firms investment rate (Capex / Lagged Ppent) and the discount rate uncertainty.
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Firms obtain noisy estimates of investors’ required rates of return (discount rates) using market-based information. Discounted-cash-flow (DCF) methods as commonly taught in MBA courses lead to upward-biased estimates of project values in the presence of such noise, even when cash flow and discount rate estimates are unbiased, due to Jensen’s inequality. We show that this bias affects corporate investment decisions and firm financial performance, and we test additional predictions derived from the DCF model in the presence of noisy discount rates. Our evidence implies that a one standard-deviation increase in discount rate uncertainty is associated with increased firm investment of 6.8%, while profitability decreases by 4.1%.
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Articles Published in Refereed Journals
1- Real Option Exercise: Empirical Evidence (August 2020), with Erik P. Gilje and Jérôme P. Taillard (Review of Financial Studies )
[SSRN Version] [RFS Version]
- Best paper at the 15th Annual Conference in Financial Economics at IDC-Herzliya (2018)
- Best paper at the 6th Annual USC Marshall Ph.D. Conference in Finance (2018)
This figure plots the distribution of the estimated forgone value, the difference between the underlying value (V) and the real option trigger value (V*) (i.e., V-V*) . A value to the left of the vertical line at zero corresponds to exercising the real option too early.
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We study when and why firms exercise real options. Using detailed project-level investment data, we find that the likelihood that a firm exercises a real option is strongly related to peer exercise behavior. Peer exercise decisions are as important in explaining exercise behavior as variables commonly associated with standard real option theories, such as volatility. We identify peer effects using localized exogenous variation in peer project exercise decisions and find evidence consistent with information externalities being important for exercise behavior.
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