Managing with Style: the Effect of Managers on Firm Policies∗

This paper investigates whether and how individual managers affect corporate behavior and performance. We construct a manager-firm matched panel data set which enables us to track the top managers across different firms over time. We find that manager fixed effects matter for a wide range of corporate decisions. A significant extent of the heterogeneity in investment, financial and organizational practices of firms can be explained by the presence of manager fixed effects. We identify specific patterns in managerial decision making that appear to indicate general differences in “style” across managers. Moreover, we show that management style is significantly related to manager fixed effects in performance and that managers with higher performance fixed effects receive higher compensation and are more likely to be found in better governed firms. In a final step, we tie back these findings to observable managerial characteristics. We find that executives from earlier birth cohorts appear on average to be more conservative; on the other hand, managers who hold an MBA degree seem to follow on average more aggressive strategies. ∗We thank the editors (Lawrence Katz and Edward Glaeser), three anonymous referees, Kent Daniel, Rebecca Henderson, Steven Kaplan, Kevin J. Murphy, Sendhil Mullainathan, Canice Prendergast, David Scharfstein, Jerry Warner, Michael Weisbach, seminar participants at Harvard University, the Kellogg Graduate School of Management, the Massachusetts Institute of Technology, the University of Chicago Graduate School of Business, the University of Illinois at Urbana-Champaign, Rochester University and the Stockholm School of Economics for many helpful comments. We thank Kevin J. Murphy and Robert Parrino for generously providing us with their data. Jennifer Fiumara and Mike McDonald provided excellent research assistance. E-mail: [email protected]; [email protected].