WORKING PAPERS
Why are CEOs rarely succeeded by external candidates?
L. He and E. Schroth
We claim that large US public firms are run by outsider CEOs only 8.4% of the time mostly because boards have a strong subjective preference for promoting insiders. We estimate a dynamic model of a board's CEO hiring choices to confront the subjective preference channel to other forces against external appointments. Search costs, transition costs, and lower productivity are reasons for infrequent external hiring, but their combined effects are smaller than those of the board's preferences alone. Without such bias, we predict a 49% frequency of outsider control. Younger boards are the most biased towards internal promotions, suggesting that career concerns shape directors' hiring choices.
How Do Firms Choose between Growth and Efficiency?
L. Frésard, L. Mancini, E. Schroth, and D. Sinno
This paper explores the relation between firms’ growth and efficiency. To measure it, our approach treats productive efficiency as a deliberate choice made by firms, as opposed to taken as given by the firm and estimated as a residual. In our model, firms choose capital and labor jointly with effort to make these inputs more productive. Fitting the model to the data, we obtain granular estimates of firms’ unobservable efficiency and find that young firms prioritize growth, while older firms focus more on efficiency. Over time, firms tend to shift their emphasis towards efficiency. Among young firms, those that pursue high growth tend to achieve higher markups, but also face a greater risk of failure. Our analysis sheds light on the factors that influence firms’ growth and efficiency strategies and their implications.
How prevalent are financial constraints in the US?
J. Farre-Mensa, A. Ljungqvist, and E. Schroth
We structurally estimate a set of firm- and time-varying measures of the magnitude of external financial constraints. By considering the entire capital structure—equity and debt of various maturities—we identify on which external financing margin(s) a firm is constrained at a given point in time. Using a sample of 10,902 U.S. stock market listed firms from 1989 to 2018, we find that 43% of firm-quarters are equity-constrained but far fewer are constrained to raise short-term debt (33%) or long-term debt (24%). A firm is simultaneously constrained on all three margins only 12% of the time. The prevalence of financial constraints is highly volatile, typically increasing in the runup to and during recessions. While being unconstrained is a persistent state, being constrained is not, with firms that enter a constrained state exiting it again relatively quickly.
Liquidity provision in the secondary market for private equity fund stakes
R. Albuquerque, J. Cassel, L. Phalippou, and E. Schroth
We study the determinants of the demand for private equity fund stakes in the secondary market, in which discounts vary significantly over time and across funds. Using proprietary data on bids between 2009 and 2016, we show that the demand response to measures of aggregate liquidity in other financial markets varies considerably by type of bidders and type of funds. In particular, while the demands for most fund types decrease when liquidity conditions deteriorate, some fund types experience an increase in demand. We also find that bids are lower when liquidity-driven demand is higher. This result is strongest for young funds. We discuss how our results relate to theories of liquidity provision.