We investigate whether differences in individuals’ experiences of macro-economic shocks affect longterm risk attitudes, as is often suggested for the generation that experienced the Great Depression. Using data from the Survey of Consumer Finances from 1964-2004, we find that birth-cohorts that have experienced high stock market returns throughout their life are more likely to be stock market participants, and, if they participate, invest a higher fraction of liquid wealth in stocks. They also report lower aversion to risk. These results are estimated controlling for age effects, year effects, and a broad set of household characteristics. Our estimates indicate that stock market returns early in life affect risktaking several decades later. However, more recent returns have a stronger effect, which fades away slowly as time progresses. Thus, the experience of risky asset payoffs over the course of an individuals’ life affects subsequent risk-taking. Our results explain, for example, the relatively low rates of stock market participation among young households in the early 1980s (following the disappointing stock market returns in the 1970s depression) and the relatively high participation rates of young investors in the late 1990s (following the boom years in the 1990s).

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We analyze how directors with financial expertise affect corporate decisions. Using a novel panel data set, we find that financial experts exert significant influence, though not necessarily in the interest of shareholders. When commercial bankers join boards, external funding increases and investment-cash flow sensitivity decreases. However, the increased financing flows to firms with good credit but poor investment opportunities. Similarly, investment bankers on boards are associated with larger bond issues but worse acquisitions. We find little evidence that financial experts affect compensation policy. The results suggest that mandating financial expertise on boards may not benefit shareholders if conflicting interests (e.g., bank profits) are neglected.

This article concerns the real-world importance of leader-ship for the success or failure of organizations and social institutions. The authors propose conceptualizing leader-ship and evaluating leaders in terms of the performance of the team or organization for which they are responsible. The authors next offer a taxonomy of the dependent vari-ables used as criteria in leadership studies. A review of research using this taxonomy suggests that the vast empir-ical literature on leadership may tell us more about the success of individual managerial careers than the success of these people in leading groups, teams, and organiza-tions. The authors then summarize the evidence showing that leaders do indeed affect the performance of organiza-tions—for better or for worse—and conclude by describing the mechanisms through which they do so.

We show that measurable managerial characteristics have significant explanatory power for corporate financing decisions. First, managers who believe that their firm is undervalued view external financing as overpriced, especially equity financing. Such overconfident managers use less external finance and, conditional on accessing external capital, issue less equity than their peers. Second, CEOs who grew up during the Great Depression are averse to debt and lean excessively on internal finance. Third, CEOs with military experience pursue more aggressive policies, including heightened leverage. Complementary measures of CEO traits based on press portrayals confirm the results.

This paper studies the effect of top managers on corporate financing decisions. Differences among CEOs account for a great deal of the variation in leverage among firms. After a CEO is forced out, leverage typically declines. Firms that offer higher pay-for-performance to the top executives, adjust leverage to target more rapidly. CEO personal characteristics are not closely connected to corporate leverage choices. To some extent the CEO may be serving as a proxy for an entire management team. The CFO seems to play at least as important a role as the CEO in determining corporate leverage. JEL classification: G32

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People believe that they are better than others on easy tasks and worse than others on difficult tasks. In previous attempts to explain these better-than-average and worse-than-average effects, researchers have invoked bias and motivation as causes. In this article, the authors develop a more parsimonious account, the differential information explanation, in which it is assumed only that people typically have better information about themselves than they do about others. When one’s own performance is exceptional (either good or bad), it is often reasonable to assume others ’ will be less so. Consequently, people estimate the performance of others as less extreme (more regressive) than their own. The result is that people believe they are above average on easy tasks and below average on difficult tasks. These effects are exacerbated when people have accurate information about their performances, increasing the natural discrepancy between knowledge of the self and knowledge of others. The effects are attenuated when people obtain accurate information about the performances of others.

Previous empirical work on adverse consequences of CEO overconfidence raises the question of why firms hire overconfident managers. Theoretical research suggests a reason: overconfidence can benefit shareholders by increasing investment in risky projects. Using options- and press-based proxies for CEO overconfidence, we find that over the 1993–2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development expenditures. However, overconfident managers achieve greater innovation only in innovative in-dustries. Our findings suggest that overconfidence helps CEOs exploit innovative growth opportunities. STEVE JOBS, FORMER CEO of Apple Computers, was ranked by Business-Week as one of the greatest innovators of the last 75 years in a 2004 article—written before Apple’s introduction of the path-breaking iPhone and iPad—because “More than anyone else, Apple’s co-founder has brought digital