📜Schoar03_Managing with Style

# Managing with Style: The Effect of Managers on Firm Policies ## Overview This groundbreaking paper by Bertrand and Schoar (2003) establishes that individual managers systematically affect corporate policies through persistent personal "styles" that travel with them across firms. By tracking 500+ executives across multiple companies, the authors demonstrate that manager fixed effects explain significant variation in investment, financial, and organizational strategies. ## 🗄️1: Table of Contents (Question-Answer Format) | Section/Subsection | Question | Answer | Literature Brick | | ------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------- | | I. Introduction | How much do individual managers matter for firm behavior and economic performance? | 🧍‍♀️ Individual managers imprint their personal "styles" on companies, with manager fixed effects explaining significant variation in corporate practices beyond firm and industry factors | • Reed CEO quote on management styles • Finance literature on capital structure determinants • Management science on CEO decision-making | | II. Why Should Managers Matter? | What theoretical explanations exist for manager-specific effects on firm policies? | 🧭 Two interpretations emerge: (1) managers impose idiosyncratic styles when control is poor, or (2) firms optimally match with managers based on strategic needs | • Neoclassical view of homogeneous managers • Agency models of managerial discretion • Matching models of firm-manager fit | | III. Data Construction | How can we separate manager effects from firm effects? | 🗺️ By constructing a manager-firm matched panel tracking executives across firms, requiring 3+ year tenures to ensure managers can "imprint their mark" | • Forbes 800 CEO data (1969-1999) • Execucomp top 5 executives (1992-1999) • COMPUSTAT financial data | | IV. Heterogeneity in Practices | Do manager fixed effects significantly affect corporate policies? | 🧍‍♀️ Manager fixed effects increase adjusted R² by 4+ percentage points on average, with particularly strong effects on acquisitions, diversification, dividend policy, and cost-cutting | • Fixed effects panel regressions • F-tests of joint significance • Persistence tests across firms | | V. Interpretations & Efficiency | Are manager styles related to performance and compensation? | 💸 Managers with higher performance fixed effects receive higher compensation and are found in better-governed firms, suggesting some styles are genuinely better | • Governance proxies (block ownership) • Compensation residuals analysis • Performance-style correlations | | VI. Observable Characteristics | Can we tie management styles to observable traits? | 🧍‍♀️ Older CEOs are more conservative (lower leverage, higher cash), while MBA holders are more aggressive (higher investment, lower dividends) | • Birth cohort effects • MBA education effects • Within-firm variation analysis | ## 🗄️2: Comparison with Existing Theories |Aspect|Traditional Finance Models|Agency Theory|Manager Fixed Effects Model|Optimal Matching Model| |---|---|---|---|---| |**Core Assumption**|Firms optimize based on industry and firm characteristics|Managers pursue self-interest subject to governance constraints|📐 Individual managers have persistent styles affecting decisions|Firms strategically select managers for current needs| |**View of Managers**|Homogeneous, interchangeable inputs|Opportunistic agents requiring monitoring|Heterogeneous individuals with distinct, persistent approaches|Specialized assets with varying match quality| |**Source of Variation**|Firm characteristics, industry factors, market conditions|Strength of governance mechanisms|Manager-specific preferences, skills, or beliefs|Time-varying firm strategic needs| |**Persistence**|Not addressed|Depends on governance|Styles persist across firms and time|Changes with firm requirements| |**Performance Implications**|All firms converge to optimal policies|Weak governance enables value destruction|💸 Some styles systematically outperform others|All matches are ex-ante optimal| |**Empirical Support**|Low R² in traditional models|Mixed evidence on governance effects|Strong fixed effects, persistence across firms|Limited support for pure matching| ## 🗄️3: Practical Implications | Domain | Implication | Example Application | | -------------------------- | ----------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | | **Board Hiring Decisions** | 💸 Manager track records provide valuable signals about future policies and performance | Screen CEO candidates based on their historical patterns in leverage, acquisitions, and R&D spending at previous firms | | **Executive Compensation** | Pay premiums for managers with performance-enhancing styles are economically justified | Structure compensation to attract managers with proven track records of value creation rather than just industry experience | | **Succession Planning** | Manager selection has lasting effects on firm trajectory beyond immediate strategic needs | Consider how a candidate's demonstrated style aligns with long-term organizational culture and strategy | | **Corporate Governance** | Better-governed firms successfully attract managers with superior styles | Strengthen governance to enable selection of high-quality managers; use ownership concentration as selection mechanism | | **Investment Analysis** | 💸 Management changes signal predictable shifts in corporate policies | Adjust valuation models when firms hire CEOs with aggressive M&A histories or conservative financial approaches | | **Management Education** | MBA training instills more aggressive, market-oriented decision-making | Business schools should recognize their role in shaping systematic differences in managerial approaches | ## Key Resources ### 🖼️1: Need-Solution Mapping **Problem (💜)**: Large unexplained heterogeneity in corporate practices exists even after controlling for firm and industry characteristics. Traditional models leave 60-70% of variation unexplained, suggesting missing factors. **Solution (💚)**: Introduce manager fixed effects through a matched panel tracking executives across firms. This reveals that individual managers explain 4-11% additional variation through persistent personal styles that travel with them. ### 🖼️2: Methodology Visualization The paper employs a **manager-firm matched panel design** that tracks 500+ executives across multiple firms: 1. **Identification Strategy**: Requires managers observed in 2+ firms with 3+ year tenures 2. **Key Innovation**: Separates manager fixed effects from firm fixed effects through job switches 3. **🔴(💜,💚) Tradeoff**: Sample selection toward larger firms and external hires vs. ability to identify causal manager effects 4. **Validation Tests**: Persistence analysis shows styles continue in new firms; placebo tests confirm changes happen after (not before) manager arrival ## Final Integrated SVG Poster <svg viewBox="0 0 1200 800" xmlns="http://www.w3.org/2000/svg">  <rect width="1200" height="800" fill="#f8f9fa" />  <rect x="20" y="20" width="1160" height="80" rx="10" fill="#2c3e50" /> <text x="600" y="50" font-family="Arial, sans-serif" font-size="28" font-weight="bold" fill="white" text-anchor="middle">Managing with Style: The Effect of Managers on Firm Policies</text> <text x="600" y="80" font-family="Arial, sans-serif" font-size="18" fill="white" text-anchor="middle">Bertrand & Schoar (2003) - QJE</text>  <rect x="20" y="120" width="560" height="200" rx="10" fill="white" stroke="#3498db" stroke-width="2" /> <text x="300" y="145" font-family="Arial, sans-serif" font-size="18" font-weight="bold" text-anchor="middle">Core Questions & Answers</text> <text x="40" y="170" font-family="Arial, sans-serif" font-size="14" font-weight="bold">Q: Do individual managers matter?</text> <text x="40" y="190" font-family="Arial, sans-serif" font-size="12">A: Yes, manager fixed effects explain 4-11% of variation</text> <text x="40" y="220" font-family="Arial, sans-serif" font-size="14" font-weight="bold">Q: Do styles persist across firms?</text> <text x="40" y="240" font-family="Arial, sans-serif" font-size="12">A: Yes, correlations of 0.3-0.8 between first and second firms</text> <text x="40" y="270" font-family="Arial, sans-serif" font-size="14" font-weight="bold">Q: Are some styles better?</text> <text x="40" y="290" font-family="Arial, sans-serif" font-size="12">A: Yes, high-performance managers earn more and join better firms</text>  <rect x="600" y="120" width="580" height="200" rx="10" fill="white" stroke="#e74c3c" stroke-width="2" /> <text x="890" y="145" font-family="Arial, sans-serif" font-size="18" font-weight="bold" text-anchor="middle">Problem → Solution</text>  <rect x="620" y="160" width="240" height="140" rx="8" fill="#f0e6ff" stroke="#9370db" stroke-width="2" /> <text x="740" y="180" font-family="Arial, sans-serif" font-size="14" font-weight="bold" text-anchor="middle" fill="#4b0082">Problem (💜)</text> <text x="740" y="205" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">60-70% unexplained variation</text> <text x="740" y="225" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">in corporate policies after</text> <text x="740" y="245" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">controlling for firm/industry</text> <text x="740" y="265" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">Missing factor: Managers?</text>  <path d="M 860 220 L 920 220" stroke="#000" stroke-width="3" fill="none" marker-end="url(#arrowhead)" /> <defs> <marker id="arrowhead" markerWidth="10" markerHeight="7" refX="9" refY="3.5" orient="auto"> <polygon points="0 0, 10 3.5, 0 7" fill="#000" /> </marker> </defs>  <rect x="920" y="160" width="240" height="140" rx="8" fill="#e6ffe6" stroke="#4caf50" stroke-width="2" /> <text x="1040" y="180" font-family="Arial, sans-serif" font-size="14" font-weight="bold" text-anchor="middle" fill="#008000">Solution (💚)</text> <text x="1040" y="205" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">Track managers across firms</text> <text x="1040" y="225" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">Manager fixed effects explain</text> <text x="1040" y="245" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">4-11% additional variation</text> <text x="1040" y="265" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">Styles persist across jobs</text>  <rect x="20" y="340" width="560" height="220" rx="10" fill="white" stroke="#27ae60" stroke-width="2" /> <text x="300" y="365" font-family="Arial, sans-serif" font-size="18" font-weight="bold" text-anchor="middle">📐 Literature Contribution</text> <line x1="40" y1="380" x2="560" y2="380" stroke="#ccc" stroke-width="1" /> <text x="50" y="400" font-family="Arial, sans-serif" font-size="12" font-weight="bold">Traditional Models</text> <text x="250" y="400" font-family="Arial, sans-serif" font-size="12" font-weight="bold">This Paper</text> <text x="420" y="400" font-family="Arial, sans-serif" font-size="12" font-weight="bold">Impact</text> <text x="50" y="425" font-family="Arial, sans-serif" font-size="11">Firms optimize based</text> <text x="50" y="440" font-family="Arial, sans-serif" font-size="11">on characteristics</text> <text x="250" y="425" font-family="Arial, sans-serif" font-size="11">Managers have</text> <text x="250" y="440" font-family="Arial, sans-serif" font-size="11">persistent styles</text> <text x="420" y="425" font-family="Arial, sans-serif" font-size="11">+4-11% R²</text> <text x="420" y="440" font-family="Arial, sans-serif" font-size="11">explained</text> <text x="50" y="470" font-family="Arial, sans-serif" font-size="11">Managers are</text> <text x="50" y="485" font-family="Arial, sans-serif" font-size="11">interchangeable</text> <text x="250" y="470" font-family="Arial, sans-serif" font-size="11">Systematic differences</text> <text x="250" y="485" font-family="Arial, sans-serif" font-size="11">across individuals</text> <text x="420" y="470" font-family="Arial, sans-serif" font-size="11">New paradigm for</text> <text x="420" y="485" font-family="Arial, sans-serif" font-size="11">corporate finance</text> <text x="50" y="520" font-family="Arial, sans-serif" font-size="11">Focus on firm/</text> <text x="50" y="535" font-family="Arial, sans-serif" font-size="11">industry factors</text> <text x="250" y="520" font-family="Arial, sans-serif" font-size="11">Manager dimension</text> <text x="250" y="535" font-family="Arial, sans-serif" font-size="11">critical</text> <text x="420" y="520" font-family="Arial, sans-serif" font-size="11">Explains M&A,</text> <text x="420" y="535" font-family="Arial, sans-serif" font-size="11">leverage patterns</text>  <rect x="600" y="340" width="580" height="220" rx="10" fill="white" stroke="#f39c12" stroke-width="2" /> <text x="890" y="365" font-family="Arial, sans-serif" font-size="18" font-weight="bold" text-anchor="middle">🔴 Implementation Tradeoffs</text>  <ellipse cx="750" cy="450" rx="100" ry="70" fill="#ffe6e6" stroke="#e74c3c" stroke-width="2" /> <text x="750" y="440" font-family="Arial, sans-serif" font-size="14" font-weight="bold" text-anchor="middle" fill="#c0392b">Challenges (💜)</text> <text x="750" y="460" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">• Selection bias</text> <text x="750" y="475" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">• External hires only</text> <text x="750" y="490" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">• Larger firms</text> <ellipse cx="1030" cy="450" rx="100" ry="70" fill="#e6ffe6" stroke="#27ae60" stroke-width="2" /> <text x="1030" y="440" font-family="Arial, sans-serif" font-size="14" font-weight="bold" text-anchor="middle" fill="#27ae60">Benefits (💚)</text> <text x="1030" y="460" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">• Clean identification</text> <text x="1030" y="475" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">• Persistence tests</text> <text x="1030" y="490" font-family="Arial, sans-serif" font-size="11" text-anchor="middle">• Causal evidence</text>  <line x1="890" y1="520" x2="890" y2="540" stroke="#34495e" stroke-width="3" /> <line x1="820" y1="540" x2="960" y2="540" stroke="#34495e" stroke-width="3" /> <line x1="820" y1="540" x2="750" y2="510" stroke="#34495e" stroke-width="2" /> <line x1="960" y1="540" x2="1030" y2="510" stroke="#34495e" stroke-width="2" />  <rect x="20" y="580" width="1160" height="200" rx="10" fill="white" stroke="#8e44ad" stroke-width="2" /> <text x="600" y="605" font-family="Arial, sans-serif" font-size="18" font-weight="bold" text-anchor="middle">💸 Three Main Applications</text>  <rect x="50" y="625" width="350" height="130" rx="8" fill="#f5f3ff" stroke="#8e44ad" stroke-width="1" /> <text x="225" y="650" font-family="Arial, sans-serif" font-size="14" font-weight="bold" text-anchor="middle">1. Board Hiring Decisions</text> <text x="70" y="675" font-family="Arial, sans-serif" font-size="11">• Screen candidates on historical styles</text> <text x="70" y="695" font-family="Arial, sans-serif" font-size="11">• Leverage, M&A, R&D patterns matter</text> <text x="70" y="715" font-family="Arial, sans-serif" font-size="11">• Performance track records persist</text> <text x="70" y="735" font-family="Arial, sans-serif" font-size="11">• Match style to strategic needs</text>  <rect x="425" y="625" width="350" height="130" rx="8" fill="#f5f3ff" stroke="#8e44ad" stroke-width="1" /> <text x="600" y="650" font-family="Arial, sans-serif" font-size="14" font-weight="bold" text-anchor="middle">2. Investment Analysis</text> <text x="445" y="675" font-family="Arial, sans-serif" font-size="11">• CEO changes signal policy shifts</text> <text x="445" y="695" font-family="Arial, sans-serif" font-size="11">• Adjust valuations for manager styles</text> <text x="445" y="715" font-family="Arial, sans-serif" font-size="11">• Predict M&A activity changes</text> <text x="445" y="735" font-family="Arial, sans-serif" font-size="11">• Anticipate leverage adjustments</text>  <rect x="800" y="625" width="350" height="130" rx="8" fill="#f5f3ff" stroke="#8e44ad" stroke-width="1" /> <text x="975" y="650" font-family="Arial, sans-serif" font-size="14" font-weight="bold" text-anchor="middle">3. Compensation Design</text> <text x="820" y="675" font-family="Arial, sans-serif" font-size="11">• Pay premiums for proven performers</text> <text x="820" y="695" font-family="Arial, sans-serif" font-size="11">• Style-performance link justifies pay</text> <text x="820" y="715" font-family="Arial, sans-serif" font-size="11">• Better governance attracts talent</text> <text x="820" y="735" font-family="Arial, sans-serif" font-size="11">• MBA holders command premiums</text> </svg> This research fundamentally reshapes our understanding of corporate decision-making by demonstrating that the identity of individual managers matters profoundly for firm outcomes, with implications spanning executive selection, compensation, and investment analysis.