Marius Guenzel

Marius Guenzel, In Too Deep: The Effect of Sunk Costs on Corporate Investment.

Abstract: Sunk costs are unrecoverable costs that should not affect decision-making. I provide evidence that firms systematically fail to ignore sunk costs and that this leads to significant distortions in investment decisions. In fixed exchange ratio stock mergers, aggregate market fluctuations after parties enter into a binding merger agreement induce plausibly exogenous variation in the final acquisition cost. These quasi-random cost shocks strongly predict firms' commitment to an acquired business following deal completion, with an interquartile cost increase reducing subsequent divestiture rates by 8-9%. Placebo cost shocks, derived from market fluctuations that did not affect actual acquisition costs, do not predict divestiture rates. Consistent with an intrapersonal sunk cost mechanism, distortions from actual cost shocks are concentrated in firm-years in which the acquiring CEO is still in office.

Mark Borgschulte, Marius Guenzel, Canyao Liu, Ulrike Malmendier, CEO Stress, Aging, and Death.

Abstract: We estimate the long-term effects of experiencing high levels of job demands on the mortality and aging of CEOs. The estimation exploits variation in takeover protection and industry crises. First, using hand-collected data on the dates of birth and death for 1,605 CEOs of large, publicly-listed U.S. firms, we estimate the resulting changes in mortality. The hazard estimates indicate that CEOs’ lifespan increases by two years when insulated from market discipline via anti-takeover laws, and decreases by 1.5 years in response to an industry-wide downturn. Second, we apply neural-network based machine-learning techniques to assess visible signs of aging in pictures of CEOs. We estimate that exposure to a distress shock during the Great Recession increases CEOs’ apparent age by one year over the next decade. Our findings imply significant health costs of managerial stress, also relative to known health risks.

Marius Guenzel and Ulrike Malmendier (2020), Behavioral Corporate Finance: The Life Cycle of a CEO Career, Oxford Research Encyclopedia of Economics and Finance, September 2020.

Abstract: One of the fastest-growing areas of finance research is the study of managerial biases and their implications for firm outcomes. Since the mid-2000s, this strand of behavioral corporate finance has provided theoretical and empirical evidence on the influence of biases in the corporate realm, such as overconfidence, experience effects, and the sunk-cost fallacy. The field has been a leading force in dismantling the argument that traditional economic mechanisms — selection, learning, and market discipline — would suffice to uphold the rational-manager paradigm. Instead, the evidence reveals that behavioral forces exert a significant influence at every stage of a chief executive officer’s (CEO’s) career. First, at the appointment stage, selection does not impede the promotion of behavioral managers. Instead, competitive environments oftentimes promote their advancement, even under value-maximizing selection mechanisms. Second, while at the helm of the company, learning opportunities are limited, since many managerial decisions occur at low frequency, and their causal effects are clouded by self-attribution bias and difficult to disentangle from those of concurrent events. Third, at the dismissal stage, market discipline does not ensure the firing of biased decision-makers as board members themselves are subject to biases in their evaluation of CEOs. By documenting how biases affect even the most educated and influential decision-makers, such as CEOs, the field has generated important insights into the hard-wiring of biases. Biases do not simply stem from a lack of education, nor are they restricted to low-ability agents. Instead, biases are significant elements of human decision-making at the highest levels of organizations. An important question for future research is how to limit, in each CEO career phase, the adverse effects of managerial biases. Potential approaches include refining selection mechanisms, designing and implementing corporate repairs, and reshaping corporate governance to account not only for incentive misalignments but also for biased decision-making.