Corporate Finance III
Session Chair: André Gygax, The University of Melbourne
Cesare Fracassi, The University of Texas at Austin
Ilona Babenko, Arizona State University
CEO Pet Projects
Paul Décaire, Arizona State University
Denis Sosyura, Arizona State University
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 pet 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. Using information from CEOs’ relatives as an instrument for the location of their private assets, we argue that these effects are causal. Overall, we uncover CEOs’ private monetary motives in capital budgeting decisions.
Smokestacks and the Swamp
Emilio Bisetti, The Hong Kong University of Science and Technology
Stefan Lewellen, Pennsylvania State University
Arkodipta Sarkar, The Hong Kong University of Science and Technology
Xiao Zhao, The Hong Kong University of Science and Technology
We examine the causal effect of politicians’ partisan ideologies on the industrial pollution decisions of constituent firms. Using a regression discontinuity design involving close U.S. congressional elections, we show that plants increase pollution and invest less in emissions abatement following close Republican wins. We also find evidence of reallocation: firms shift pollution away from areas newly represented by Democrats. However, costs rise and M/B ratios decline for firms whose representation becomes more Democratic, suggesting that support for politicians’ ideological demands can be privately costly. Pollution-related illnesses spike around plants in areas represented by Republicans, suggesting that firms’ pass-through of politicians’ ideological differences can have real consequences for local communities.