Looking in The Rearview Mirror The Effect of Managers' Professional Experience On Corporate Financial Policy

Looking in the Rearview Mirror: The Effect
of Managers’ Professional Experience on

Corporate Financial Policy
Amy Dittmar
Ross School of Business, University of Michigan
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Ran Duchin
Foster School of Business, University of Washington
We track the employment history of over 9,000 managers to study the effects of professional
experiences on corporate policies. Our identification strategy exploits exogenous CEO
turnovers and employment in other firms and in non-CEO roles. Firms run by CEOs who
experienced distress have less debt, save more cash, and invest less than other firms, with
stronger effects in poorly governed firms. Experience has a stronger influence when it is
more recent or occurs during salient periods in a manager’s career. We find similar effects
for CFOs. The results suggest that policies vary with managers’ experiences and throughout
managers’ careers. (JEL G30, G31, G32)
Received January 28, 2014; accepted May 17, 2015 by Editor David Denis.
A growing body of evidence suggests that managerial traits affect corporate

policies even after controlling for the firm-, industry-, and market-level
economic indicators that influence these policies. However, we know relatively
little about how managers’ decision-making develops throughout their careers.
In this paper, we investigate the potential impact of professional, or work-
related, experiences of managers on corporate financial and investment policies.
By studying the impact of professional experiences, we provide new
evidence on how both CEOs and CFOs develop their managerial style and
how the timing, frequency, and saliency of their experiences affect their
subsequent decision-making. We exploit the variation along these dimensions
across professional experiences to test several experimentally well-established
behavioral phenomena that have not been previously studied in the context
We gratefully acknowledge the helpful comments from Espen Eckbo, Sandy Klasa, Camelia Kuhnen, and
Geoffrey Tate as well as seminar participants at the 2014 Financial Intermediation Research Society Conference,
the 2014 FSU SunTrust Conference, 2013 European Finance Association Conference, the 2012 Pacific Northwest
Finance Conference, the 2012 Miami Behavioral Finance Conference, Australian National University, Drexel
University, Tulane University, the University of Arizona, the University of Maryland, the University of Michigan,
the University of New South Wales, the University of Pennsylvania, the University of Sydney, and the University
of Technology Sydney. Send correspondence to Amy Dittmar, Ross School of Business, University of Michigan,
701 Tappan Avenue, Ann Arbor, Michigan, 48109; telephone: (734) 764-3108. E-mail: adittmar@umich.edu.
© The Author 2015. Published by Oxford University Press on behalf of The Society for Financial Studies.
All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com.
doi:10.1093/rfs/hhv051 Advance Access publication September 4, 2015
The Review of Financial Studies / v 29 n 3 2016
of real-world decisions made by corporate executives. We also examine how

professional experiences attenuate or enhance the impact of previously studied
managerial traits and personal experiences on corporate policy.
The importance of experience in decision-making is demonstrated in the
psychology literature (Nisbett and Ross 1980). Studies show that experience
may lead individuals to make decisions that differ from those based on expected
utility theory because they only have access to samples of past outcomes and
not the full outcome distributions (e.g., Hertwig, Barron, Weber, and Erev 2004;
Hertwig and Erev 2009; and Hertwig 2012). In finance, a growing literature

examines how individual experiences affect investor behavior (Vissing-
Jorgensen 2004; Kaustia and Knupfer 2008; Greenwood and Nagel 2009;
Chiang et al. 2011; Malmendier and Nagel 2011, Malmendier and Nagel Forth-
coming). Malmendier and Tate (2005) and Malmendier, Tate, and Yan (2011)
show that managers’ early experiences, such as growing up during the Great
Depression and military service, affect corporate leverage and investment.
We build on this literature and explore how professional experiences affect
managers’ decisions. Our focus is on past experience with negative corporate
outcomes such as bankruptcy and financial difficulties or shocks, though we also
explore experience with positive outcomes in subsequent tests. Experiencing
troubles may alter risk preferences or expectations, and lead managers to
implement more conservative policies. This hypothesis is consistent with the
“hot stove” effect, which implies a bias against risky alternatives to avoid
actions that have led to poor outcomes (Denrell and March 2001). Indeed,
Eckbo and Thornburn (2003) and Eckbo, Thornburn, and Wang (2012) show
that bankruptcy leads to poor outcomes for the CEO.
To determine the effect of managers’ professional experiences on corporate
decisions, we use data from ExecuComp and BoardEx to track the employment
history of approximately 5,200 CEOs and 4,000 CFOs. After excluding
managers with incomplete employment histories, the average CEO in our
sample has twenty-one years of employment data at four different firms. We
use these data to determine if a manager was previously employed by a troubled
firm. To separate CEO effects from firm effects, we require that the professional
experience have taken place at a different firm than the current firm and that
the current firm itself did not experience difficulties.
We construct four measures of poor corporate outcomes. Based on each
measure, we define a Professional experience indicator that equals one if the
manager was employed by a firm that experienced trouble during her tenure.
To mitigate the concern that the CEO is chosen based on experience running
troubled firms, our main measures consider only experience in roles other than
CEO, though we also explore experience as CEO in subsequent tests. The
first measure is based on bankruptcy filings. In our sample, 0.8% of the CEOs
previously worked at a firm that filed for bankruptcy. Because bankruptcy is
relatively infrequent and salient enough to affect a manager’s career directly,
we construct three additional measures. These measures are based on adverse
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Looking in the Rearview Mirror
shocks to a firm’s cash flows, stock returns, and credit ratings. Depending on
the measure employed, 6.4–11.5% of the CEOs in our sample experienced
trouble in at least one year of prior employment. We also create a composite
index equal to one if any of these measures equals one, with 23.8% of CEOs
experiencing difficulties using the index.
In panel regressions, we find that firms run by a CEO who was previously
employed at a troubled firm hold less debt and more cash, and invest less.
To address the concern that these findings are driven by either observable
or unobservable firm characteristics that are correlated with the CEO’s

professional experience and the firm’s policies, we control for time-varying
firm and manager characteristics and year and firm fixed effects. The effects
of professional experience are statistically significant and economically
meaningful. For the average firm, past experience at a troubled firm is associated
with a 7–13% reduction in debt (having 1.5–2.8 percentage points less debt-
to-assets), a 5–12% increase in cash (holding 1.1–2.6 percentage points more
cash-to-assets), and a 5–10% reduction in capital expenditure (investing 0.3–0.6
percentage points less in capital expenditures-to-assets).
Our use of a firm fixed effects model controls for the possibility a manager
with professional experience in a distressed firm may join a firm that is already
conservative prior to her appointment. However, a remaining concern is that
CEO changes themselves might be triggered by a change in firm characteristics
that affects corporate policy. To address this concern, we exploit the change to
the professional experience of the CEO around exogenous CEO turnovers; that
is, turnovers due to natural causes (death or illness), planned retirements, or
scheduled succession plans, and a subset of successions by internal candidates,
which are unlikely to be associated with managerial performance or a change
in the firm’s conditions. It is important to note that although recent work by
Fee, Hadlock, and Pierce (2013) shows that, on average, exogenous turnovers
are not accompanied by substantial changes in corporate policy, our empirical
design exploits cross-sectional variation in professional experience within the
subset of exogenous turnovers.1
In firm fixed effects and first differences models around exogenous CEO
turnovers, our results indicate that CEOs with professional experience at
troubled firms decrease debt-to-assets by 0.9–1.5 percentage points, increase
cash-to-assets by 2.0–2.8 percentage points, and decrease capital expenditures-
to-assets by 0.4–0.5 percentage points after they became CEOs.
The above evidence demonstrates the importance of managers’ professional
experience and is consistent with prior studies that show the impact of personal
experiences, such as being born in the Great Depression era or serving in
the military, and other managerial traits, such as overconfidence, on corporate
policy. To disentangle the effect of professional experience from personal
1 In untabulated tests, similar to Fee, Hadlock, and Pierce (2013), we find that, on average, exogenous CEO
turnovers are not accompanied by significant changes in leverage, cash, or investment policies.
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experience and other traits, we repeat our tests with measures of Great
Depression experience, military service, and overconfidence. We find that
professional experience continues to have a significant impact on corporate
policy, and moreover, that the effect of professional experience is frequently
stronger than that of the other factors.
Because professional experiences occur throughout a manager’s career, they
may attenuate or enhance the impact of personal experiences or overconfidence.
We therefore interact the manager’s professional experience with these
measures. We find that professional experience attenuates the impact of

overconfidence and enhances the impact of Depression-era experience.
To further examine how professional experience influences managers’ style
throughout their career, we exploit the variation in the timing, frequency,
and saliency of professional experiences. Several theoretical and experimental
studies suggest that these factors may influence the impact of experience. We
study three hypotheses related to this literature.
First, the reinforcement learning hypothesis suggests that individuals will
repeat positive outcomes and employ similar outcomes more frequently (Erev
and Roth 1998), consistent with Watson’s (1930) recency law, which states that
the event observed most recently is more likely repeated. To test the recency
hypothesis, we compare recent and distant experiences and find that recent
experiences have a stronger impact on corporate decisions.
Second, the saliency hypothesis (Tversky and Kahneman 1973, 1974;
Bordola, Gennaioli, and Shleifer 2012a,b) suggests that individuals infer the
frequency or probability of an event based on its saliency. According to this
hypothesis, more salient events will have a stronger impact on individual
behavior. To examine the saliency hypothesis, we reestimate our measure of
professional experience using experience that occurred when the manager was
a CEO or top-five executive at another firm, rather than a lower-rank employee.
We also examine the impact of repeated experiences. We find that experiences
during these salient periods or that occur multiple times have an even stronger
effect on corporate policy.
Third, we consider the pessimism-bias hypothesis, which predicts that
negative outcomes have asymmetrically larger effects than positive outcomes.
Consistent with this hypothesis, Kahneman and Tversky (1979) document the
impact of loss aversion, and Kuhnen (2015) shows in a lab experiment that
negative outcomes have a stronger impact than positive outcomes and lead
individuals to become overly pessimistic about investment alternatives. To
examine this hypothesis, we define an experience index that considers positive
professional experiences. We reestimate our analysis and find that positive
experience has no impact on corporate policy.
The variation in professional experiences also allows us to disentangle the
impact of CEO and CFO effects. To do this, we recreate our measures of
experience for the CFO and find that 0.6–11.1% of the CFOs in our sample
worked at a troubled firm (in roles other than CFO). When we investigate the
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joint impact of CEO and CFO experience on corporate policy, we find that both
CEO and CFO experiences affect corporate financing policy. However, only
CEO experience affects corporate investment policy, suggesting that CFOs do
not exert significant influence on the firm’s investment decisions. Further, when
both the CEO and the CFO experience distress, the effects of experience on
leverage and cash policy are even stronger.
In our final analysis, we study the relation between professional experience
and firm value. This analysis seeks to distinguish between two possible
interpretations. On the one hand, experience-driven conservatism can be

suboptimal if CEOs who experienced distress become too risk averse or
overestimate the likelihood and implications of distress. On the other hand,
these conservative policies may result from CEO learning or altering the view
of the average CEO who underestimates risk, as recently found by Ben-David,
Graham, and Harvey (2013).
Our evidence is more consistent with the suboptimal interpretation. We
find that firms that hire a CEO who experienced distress have a reduction
of 12 basis points in return on assets (ROA) and 5.5% in Tobin’s q. However,
abnormal announcement returns around the appointment of CEOs do not differ
significantly based on the CEO’s professional experience.
Consistent with this interpretation, we also find that the effect of a
CEO’s professional experience is significantly more pronounced at firms
with weaker governance, as measured by the E-index (Bebchuk, Cohen, and
Ferrell 2009) of shareholder rights, the presence of share block holders, and
board independence. A decrease of one standard deviation in the quality
of corporate governance, as measured by a composite index of these three
governance proxies, is associated with an increase of 18.6–29.8% in the effect
of professional experience on corporate policy. Overall, these results provide
suggestive, indirect evidence that distress leads managers to enact overly
conservative policies when they are not monitored by investors or the board.
Our paper contributes to the growing literature that studies the effects of
managers on corporate policies. Although existing evidence suggests that
management style affects corporate policies (Bertrand and Schoar 2003),
largely following endogenous CEO turnovers (Fee, Hadlock, and Pierce
2013), we still know relatively little about the determinants of this style
and its evolution throughout a manager’s career. Our paper improves our
understanding of this process by studying the effect of professional experiences
on financing and investment decisions.
1. Sample and Data

1.1 Firms
Our initial sample consists of 11,578 industrial firms in the CRSP/Compustat
file over 1980–2011. Industrial firms are defined as companies with SIC
codes outside the ranges 4900–4949 (utilities) and 6000–6999 (financials).
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Table 1
Firm-level summary statistics
Variable Mean Median Std. Dev. N Obs. Mean full Median full
sample sample
Leverage 0.210 0.157 0.251 35,377 0.232 0.178
Cash holdings 0.221 0.125 0.239 35,227 0.218 0.123
Capital expenditure 0.061 0.041 0.065 35,047 0.071 0.046
Tangibility 0.263 0.199 0.219 35,539 0.299 0.233
Market-to-book 2.237 1.590 1.911 35,601 2.088 1.446
Profitability 0.011 0.036 0.260 35,588 −0.051 0.029
Size 5.695 5.602 1.965 35,601 5.218 5.063
Cash flow 0.017 0.070 0.212 35,088 −0.004 0.057

Industry cash flow volatility 0.086 0.074 0.048 35,229 0.081 0.067
This table presents summary statistics for firm-level variables used in the analyses. The sample comprises
industrial firms in the Compustat/CRSP file from 1980 to 2011, with available information about the CEO’s
prior employment for the last 10 years or more (without gaps) prior to joining the firm. Leverage is total debt
divided by total assets. Cash holdings are cash and short-term investments divided by total assets. Tangibility is
measured as net property, plant, and equipment, divided by total assets. Market-to-book (or Tobin’s q) is measured
as the book value of total assets minus book value of equity plus market value of equity divided by total assets.
Profitability is net income divided by total assets. Size is the natural logarithm of the book value of total assets.
Cash flow is measured as earnings less interest and taxes, divided by total assets. Industry cash flow volatility is
the 10-year rolling window of median volatility of cash flow across the 48 Fama-French industries. The last two
columns compare the average values in our sample to the average values in the full sample of industrial firms in
the Execucomp/BoardEx sample from 1980 to 2011.
We exclude firms that are not incorporated in the United States and those that
do not have securities assigned a CRSP security code of 10 or 11. Because we
are interested in CEOs’ professional experiences we exclude firms whose CEO
is missing from ExecuComp and BoardEx. We find 5,498 firms and 52,017
firm-year observations for which the CEO has nonmissing data on previous
employment in at least one firm that appears on Compustat.
Next, we exclude from our sample CEOs with relatively short observable
employment histories of less than 10 years before the start of their current
employment. We also exclude CEOs whose employment history over the prior
10 years before the start of current employment is incomplete (one or more
years are missing). We impose these sample screens because the length of the
observed employment history and the gaps in the data may be nonrandom,
and potentially correlated with CEO attributes such as tenure or age, and with
firm attributes such as size, industry, and IPO cohort. However, to ensure this
restriction is not driving our findings, we repeat our tests keeping all managers
with any employment history and get similar results. To separate CEO effects
from firm effects, we also require that the firms in our sample did not experience
difficulties according to any of our measures, described in Section 1.3. After
imposing these screens, our final sample includes between 29,226 and 35,601
firm-year observations, depending on the measure of difficulties used.
Table 1 presents summary statistics. We winsorize all variables at the 1st
and 99th percentiles to lessen the influence of outliers. The main variables of
interest are a firm’s: (i) leverage, defined as the ratio of short-term and long-
term debt to book assets; (ii) cash holdings, defined as the ratio of cash and
short-term investments to book assets; and (iii) capital expenditure, defined as
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the ratio of capital expenditures to book assets. Table 1 shows that leverage
ratios have a pooled mean of 21.0%, cash ratios have a pooled mean of 22.1%,
and capital expenditures have a pooled mean of 6.1%. The average firm has a
firm size (log of assets) of 5.7. Table 1 also shows that the average firm has a
cash flow-to-assets ratio of 1.7%, a market-to-book ratio of 2.2, and a ratio of
fixed assets to assets (tangibility) of 26.3%.
Table 1 also compares our sample firms and the sample of public industrial
firms in the Compustat universe. Not surprisingly, the firms in our sample
tend to be larger, since their managers are more visible and have longer work

experience. We also find that the firms in our sample tend to be more profitable
(and therefore less likely distressed) compared with the average Compustat
firm. Thus, we believe that our sample firms are a good laboratory to test whether
a CEO’s professional experience of distress, rather than a firm’s distress, leads
to the implementation of more conservative corporate policies.
1.2 Managers
Our sample of executives consists of 9,133 individuals. This group includes
5,178 CEOs and 3,955 CFOs who served at our sample firms between 1980
and 2011. To collect employment information on CEOs and CFOs, we use
both ExecuComp and BoardEx. For each executive in our sample, we collect
all available information on her employment history, including the identity of
previous employers, dates of employment, and the role title. We then match the
prior employers to Compustat firms and use Compustat data to construct our
measures of professional experience at troubled firms.
Panel A of Table 2 shows summary statistics for our sample of managers.
An average CEO is 52.8 years old, worked at her firm for 7.3 years, and has
over 50% of compensation as equity-based compensation. The vast majority
(97.8%) of CEOs are male. An average CFO is slightly younger (47.1 years
old), worked at her firm for 6.8 years, and has 43% of compensation as equity
based compensation. Also, 2.4% of CFOs are female. Further, 33.3% of the
CEOs and 46.5% of the CFOs have an MBA degree. Panel A also confirms
that the managers in our sample are not significantly different from the general
population of managers at public firms. The only exception is CEO age—the
CEOs in our sample are, on average, 2.4 years older.
1.3 Measures of past professional experience

We study how work-related experiences throughout managers’ professional
lives affect managers’ careers and corporate policies. Our primary focus is
on realizations of poor outcomes—that is, experiences of bankruptcy and
distress.2 Our analysis is motivated by the psychology literature, which shows
that individual experiences influence decision-making (Nisbett and Ross 1980).
2 In later tests, we compare the impact of negative and positive professional experiences.
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Table 2
Managers
Panel A: Summary statistics
Variable Mean Median Std. dev. N. Obs. Mean full t -statistic for
sample diff. in means
CEOs
Age 52.783 53.000 8.123 35,464 50.414 2.318
Female 0.022 0.000 0.147 35,601 0.020 0.511
Tenure 7.271 5.000 7.064 35,601 7.336 0.194
Equity-based compensation 0.512 0.407 0.942 35,581 0.485 1.227
MBA degree 0.333 0.000 0.471 35,543 0.322 0.283

CFOs
Age 47.069 47.000 7.123 29,555 44.773 0.671
Female 0.024 0.000 0.152 29,961 0.025 0.135
Tenure 6.848 5.000 6.907 29,214 6.682 0.448
Equity-based compensation 0.428 0.366 0.785 28,937 0.399 0.705
MBA degree 0.465 0.000 0.499 29,476 0.431 0.931
Panel B: Frequency of professional experience

Indicator CEO N. Obs. CFO N. Obs.
Professional experience (bankruptcy) 0.8% 35,601 0.6% 29,961
Professional experience (bond ratings) 6.4% 31,205 6.1% 26,138
Professional experience (cash flow shocks) 11.5% 33,366 11.1% 27,612
Professional experience (stock returns) 11.2% 33,925 10.8% 28,003
Professional experience (composite index) 23.8% 29,226 22.0% 25,242
Panel C: Correlation between measures of CEO professional experience

Bankruptcy Bond Cash flow Stock Composite
ratings shocks returns index
Bankruptcy 1.000
Bond ratings 0.562 1.000
Cash flow shocks 0.106 0.426 1.000
Stock returns 0.172 0.338 0.331 1.000
Composite index 0.185 0.636 0.692 0.670 1.000
(continued)
More specifically, we build on the “hot stove” effect, studied by March (1996),
Denrell and March (2001), and Denrell (2007), which implies a bias against
risky alternatives to avoid actions that have led to poor outcomes. Our main
hypothesis, therefore, suggests that managers that experienced poor outcomes
of bankruptcy or distress in the past subsequently implement more conservative
corporate policies.
In contrast to prior studies, we focus on professional experiences rather than
personal experiences such as military service and growing up during the Great
Depression. We do so because professional experiences are typically more
frequent and recent, and therefore may exert greater influence on decision-
making. Further, they occur in a similar corporate setting and thus likely
comprise relevant experiences for shaping the CEO’s management style.
Finally, they can occur throughout a CEO’s career, thus implying that her
decision-making may change and evolve over time. These attributes allow
us to test several experimentally well-established behavioral hypotheses in the
context of real-world decisions made by corporate executives. Specifically, we
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Table 2
Continued
Panel D: Additional details about employment history and professional experience
Variable Mean Median Std. dev. N. Obs.
All CEOs
Employment history: N years 21.358 20.000 5.629 35,601
Employment history: N firms 3.871 3.000 3.880 35,601
CEOs with composite index = 1
N professional experiences 1.226 1.000 1.683 6,956

N years since last experience 5.249 5.000 6.528 6,956
First job experience 0.284 0.000 0.426 6,956
All CFOs
CFOs with composite index = 1
N professional experiences 1.188 1.000 1.532 5,553
N years since last experience 5.048 6.000 6.104 5,553
First job experience 0.236 0.000 0.410 5,553
This table presents information about the CEOs and CFOs in our sample. Panel A provides summary statistics
about managers’ age, gender, tenure, equity-based compensation, and education. Panel B describes the measures
of managers’ professional experience at troubled firms. Panel C provides the sample-wide correlations between
measures of CEO professional experience. Panel D provides additional details about managers’ employment
history and professional experiences. Professional experience (bankruptcy) is an indicator equal to 1 if the
manager worked at a firm that filed for chapter 11. Professional experience (bond ratings) is an indicator equal
to 1 if the manager worked at a firm that belonged to the lowest decile of Compustat firms based on annual
changes in credit ratings, provided that the rating was downgraded. Professional experience (cash flow shocks)
is an indicator equal to 1 if the manager worked at a firm that belonged to the lowest decile of Compustat
firms based on annual changes in operating cash flow, provided that the change in cash flow was negative.
Professional experience (stock returns) is an indicator equal to 1 if the manager worked at a firm that belonged
to the lowest decile of Compustat firms based on annual stock returns, provided that the stock return was
negative. Professional experience (composite index) is the maximum of the four professional experience variables:
Professional experience (bankruptcy), Professional experience (bond ratings), Professional experience (cash flow
shocks), Professional experience (stock returns). In all cases, we exclude past employment as the CEO of other
firms. All variable definitions are given in the Appendix.
examine the impact of repetition in reinforcing an outcome, and of timing in

determining the saliency of an event; we also compare the impact of positive
versus negative experiences in influencing corporate policy. These tests are
feasible only because professional experiences occur throughout a manager’s
career, whereas prior research focuses on one particular and important personal
experience that likely occurs at a similar time for all affected managers.
To measure CEOs’professional experience, we track the employment history
of the CEO using data from ExecuComp and BoardEx to determine if the CEO
was previously employed at a troubled firm. We restrict our attention to previous
employment at other firms to disentangle CEO effects from firm effects. To
mitigate the concern that the CEO is chosen based on her experience in running
troubled firms, we focus on professional experience in non-CEO roles, though
in subsequent tests we consider experience as CEO of other firms to test the
saliency hypothesis. To further control for firm effects, our tests exclude firms
that experienced difficulties themselves and control for firm-level, time-varying
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determinants of corporate policies, as well as unobservable time-invariant firm

effects.
Our measures of professional experience are based on the full set of
information we have available for each manager.3 For robustness and
completeness, we employ four measures of distress. The first measure is based
on bankruptcy filings. The bankruptcy data come from the Bankruptcy Research
Database of Lynn LoPucki at UCLALaw School, which includes all bankruptcy
cases filed under Chapter 7 or Chapter 11 of the bankruptcy code, for firms
that had assets worth $100 million or more (in 1980 dollars) and filed an

annual report for a year ending not less than three years prior to the filing
of the bankruptcy case. Managers who previously worked at a firm that filed
for bankruptcy during their employment are defined as having experienced
bankruptcy. A potential concern with the bankruptcy-based measure, however,
is that bankruptcy filing is salient enough to exert a significant direct effect
on a manager’s career that is unrelated to its impact on her decision-making.
Moreover, as Panel B of Table 2 shows, bankruptcy experience is relatively
infrequent, and only 0.8% of the CEOs in our sample experienced bankruptcy
in the past. We therefore construct three additional measures.
The second measure is based on adverse shocks to a firm’s bond rating.
We retrieve data on bond ratings for all industrial firms on Compustat, and
sort all firm-year observations into annual deciles based on the change in bond
ratings. Each year, firms in the lowest decile are defined as distressed, as long as
their ratings were in fact downgraded.4 Related approaches for characterizing
financial difficulties are used by Kashyap, Lamont, and Stein (1994), Gilchrist
and Himmelberg (1995), and Almeida, Campello, and Weisbach (2004). The
advantage of this measure is that it gauges the market’s assessment of a firm’s
credit quality. Managers who previously worked at a firm that was categorized
as distressed during their employment are defined as having past distress
experience. Panel B of Table 2 shows that 6.4% of the CEOs in our sample
experienced difficulties according to this measure.
Our two remaining measures of experience focus on adverse shocks to
a firm’s operating cash flows and stock returns, respectively. We define a
firm’s operating cash flow as earnings before interest, taxes, depreciation, and
amortization (EBITDA) divided by total book assets. We sort all industrial firms
on Compustat into annual deciles based on the change in annual operating cash
flow and categorize firms in the lowest decile each year as experiencing distress.
Similarly, we calculate a firm’s annual stock return, sort all industrial firms on
Compustat into annual deciles based on their stock returns, and categorize
3 We exclude any experience that occurs at a utility company, as this may be due to regulatory restraint rather than
distress.
4 Firms whose rating did not change are not classified as distressed. To address missing ratings, we determine if
the firm has had a rating in the previous year. If it did, and currently has debt outstanding and no rating, it is
classified as distressed.
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firms in the lowest decile each year as experiencing distress. To ensure that
these measures capture poor performance and therefore distress, we require
that the firms labeled as distressed by this measure have negative stock returns
or a decline in their cash flows. In our sample, the average stock return (cash
flow shock) experienced by firms in the lowest decile is −21.5% (−18.5%).5
We define managers who previously worked at a firm that was in the lowest
decile during their employment as having past experience of distress. Panel B
of Table 2 shows that 11.5% (11.2%) of the CEOs in our sample experienced
distress according to the cash flow–based (stock return–based) measure.

In addition, we also create a composite index that is equal to one if any of
the above experience measures is equal to one. Panel B of Table 2 shows that
23.8% of the CEOs in our sample experienced distress according to at least one
of the experience measures.
Panel C of Table 2 reports the sample-wide correlations between the
measures of professional experience. The estimates show that, as expected, all
measures of distress are positively correlated. These measures, however, are
only imperfectly correlated, suggesting that they capture different dimensions
of distress and motivating the use of the composite index. The correlation
between the measures ranges from 0.11 to 0.56, with bankruptcy and cash flow
shocks having the lowest and bankruptcy and credit ratings having the highest
correlations. This approach of using multiple variables to capture distress is
consistent with default prediction models such as Bharath and Shumway (2008).
Panel D of Table 2 provides additional details about the employment history
and professional experiences of CEOs. We observe 21.4 years of employment,
in 3.9 firms, for the average CEO in our sample. Similarly, for CEOs that
experienced distress according to any of our measures, we observe 21.0 years
of employment in 3.7 firms. Focusing on the subset of CEOs that experienced
distress, the average CEO in this subsample experienced difficulties 1.2 times,
thus repeated occurrences are less common. On average, the number of years
since the last experience is 5.2 years. Further, 28.4% of the CEOs experienced
difficulties in their first position, reflecting a close to even distribution over the
approximately 3.7 firms in the manager’s employment history. In Section 3,
we test the recency hypothesis by comparing the effects of recent and distant
experiences on a firm’s policy and the saliency hypothesis by comparing the
impact of repeated experiences.
Our main focus is on the professional experience of the CEO, since the
ultimate responsibility for the firm’s financial and investment strategies rests
with the CEO. However, we also study the experience of the CFO, who may
assist the CEO with financing decisions. We therefore create each measure of
experience for CFOs, described in Panels B and D of Table 2.
5 In untabulated tests, we also reconstruct these measures requiring a shock of at least −10% and find similar
results.
575
2. CEO Professional Experience and Corporate Policies

2.1 Does professional experience affect corporate policy?
Table 3 presents results of panel regressions of leverage (PanelA), cash holdings
(Panel B), and capital expenditures (Panel C) on the professional experience
of the CEO and a relevant set of firm-level determinants of each of these
policies. We test the hypothesis that the professional experience of the CEO
affects corporate policy against the null hypothesis that CEOs have no effect on
corporate policy, and firm characteristics are the only determinant of leverage,

cash, and investment, regardless of who the CEO is. We therefore also control
for unobservable firm characteristics and market-wide effects by including firm
and year fixed effects. We cluster the standard errors at the firm level.
To distinguish the effect of professional experience, we control for other
CEO traits that may affect corporate policy. First, we control for CEO age
because an older CEO has had more time to be exposed to different firm
environments and thus may be more likely to have experienced distress.
Further, Bertrand and Schoar (2003) show that CEO age has a significant
effect on corporate policies. Second, we control for the gender of the CEO
because prior studies show that men are more likely to take risk than females.
Barber and Odean (2001) and Weber, Blais, and Betz (2002), for example,
show that financial risk-taking differs by gender. More broadly, Byrnes, Miller,
and Schafer (1999) and Eckel and Grossman (2008) provide a review of the
literature on differential risk taking by gender. Third, we control for CEOs’
financial education using an MBA indicator that equals one if the CEO has an
MBA degree. Financial literacy may lead managers to rely more on external
finance in lieu of internal cash savings. Lastly, we control for CEO incentives
using equity-based compensation, defined as the fraction of total compensation
paid through stock and option grant, which may contractually mitigate the
effects of CEO preferences or the influences of past experiences, and may
also affect the incentives of the CEO to take risk. In subsequent tests, we
will also control for personal experience and other managerial traits such as
overconfidence.
Panel A of Table 3 presents the regression estimates for leverage, measured
as short-term plus long-term debt divided by total assets. Following Frank and
Goyal (2009), our firm-level controls include size (log assets), the market-
to-book ratio as a measure of investment opportunities, profitability, the
tangibility of assets (the ratio of fixed to total assets), and industry leverage.6
To control for unobservable firm characteristics that may be correlated with
the CEO’s professional experience and with the firm’s leverage policy, the
regressions also include firm fixed effects.
6 Frank and Goyal (2009) also control for inflation, which, in our empirical model, is absorbed by year fixed
effects.
576
Table 3
CEOs’ professional experience and corporate policy
Panel A: Leverage
Measure of Professional Professional Professional Professional Composite
professional experience experience experience experience index of
experience (bankruptcy) (bond (cash flow (stock professional
ratings) shocks) returns) experience
Model (1) (2) (3) (4) (5)
Professional experience −0.024∗∗ −0.028∗∗ −0.015∗∗∗ −0.017∗∗∗ −0.021∗∗∗
[0.011] [0.013] [0.005] [0.005] [0.007]
Industry leverage 0.465∗∗∗ 0.460∗∗∗ 0.459∗∗∗ 0.462∗∗∗ 0.461∗∗∗

[0.026] [0.026] [0.025] [0.025] [0.026]
Tangibility 0.139∗∗∗ 0.144∗∗∗ 0.140∗∗∗ 0.142∗∗∗ 0.144∗∗∗
[0.021] [0.021] [0.021] [0.022] [0.021]
Market-to-book 0.003 0.004 0.003 0.004 0.004
[0.004] [0.004] [0.004] [0.004] [0.003]
Profitability −0.163∗∗∗ −0.165∗∗∗ −0.166∗∗∗ −0.165∗∗∗ −0.163∗∗∗
[0.046] [0.047] [0.048] [0.048] [0.046]
Size 0.017∗∗∗ 0.017∗∗∗ 0.017∗∗∗ 0.017∗∗∗ 0.017∗∗∗
[0.005] [0.005] [0.005] [0.005] [0.005]
CEO age (/100) 0.001 0.009 0.009 0.010 0.007
[0.036] [0.035] [0.038] [0.036] [0.036]
Female −0.009∗ −0.011∗∗ −0.010∗ −0.008∗ −0.009∗
[0.005] [0.005] [0.006] [0.004] [0.005]
MBA degree 0.008∗∗ 0.009∗∗∗ 0.010∗∗∗ 0.008∗∗ 0.009∗∗∗
[0.003] [0.003] [0.003] [0.003] [0.003]
Equity-based compensation 0.143∗∗∗ 0.144∗∗∗ 0.146∗∗∗ 0.149∗∗∗ 0.144∗∗∗
[0.037] [0.038] [0.041] [0.042] [0.037]
Year fixed effects Yes Yes Yes Yes Yes
Firm fixed effects Yes Yes Yes Yes Yes
N. Obs. 34,954 30,712 32,683 33,018 29,226
R2 0.629 0.627 0.624 0.631 0.635
Panel B: Cash holdings
Professional experience 0.011∗∗∗ 0.017∗∗ 0.026∗∗∗ 0.019∗∗∗ 0.018∗∗∗
[0.004] [0.005] [0.008] [0.004] [0.006]
Industry cash flow volatility 0.192∗∗∗ 0.192∗∗∗ 0.191∗∗∗ 0.193∗∗∗ 0.191∗∗∗
[0.060] [0.060] [0.060] [0.061] [0.060]
Cash flow 0.068∗∗∗ 0.067∗∗∗ 0.067∗∗∗ 0.068∗∗∗ 0.068∗∗∗
[0.010] [0.010] [0.010] [0.010] [0.010]
Market-to-book 0.011∗∗∗ 0.011∗∗∗ 0.011∗∗∗ 0.012∗∗∗ 0.011∗∗∗
[0.001] [0.001] [0.001] [0.001] [0.001]
Credit ratings −0.024 −0.024 −0.024 −0.024 −0.027
[0.017] [0.017] [0.017] [0.017] [0.017]
Size −0.025∗∗∗ −0.025∗∗∗ −0.025∗∗∗ −0.025∗∗∗ −0.025∗∗∗
[0.002] [0.002] [0.002] [0.002] [0.002]
CEO age (/100) −0.093∗∗∗ −0.095∗∗∗ −0.094∗∗∗ −0.097∗∗∗ −0.094∗∗∗
[0.012] [0.012] [0.012] [0.010] [0.012]
Female 0.021∗∗ 0.021∗∗ 0.019∗∗ 0.020∗∗ 0.020∗∗
[0.009] [0.009] [0.009] [0.008] [0.008]
MBA degree −0.002 −0.003 −0.003 −0.003 −0.003
[0.002] [0.002] [0.002] [0.003] [0.003]
Equity-based compensation −0.012∗∗∗ −0.012∗∗∗ −0.012∗∗∗ −0.012∗∗∗ −0.012∗∗∗
[0.003] [0.003] [0.003] [0.003] [0.003]
N. Obs. 34,954 30,712 32,683 33,018 29,226
R2 0.842 0.842 0.843 0.843 0.846
(continued)
577
Table 3
Continued
Panel C: Capital expenditures
Measure of Professional Professional Professional Professional Composite
professional experience experience experience experience index of
experience (bankruptcy) (bond (cash flow (stock professional
ratings) shocks) returns) experience
Model (1) (2) (3) (4) (5)
Professional experience −0.006∗∗ −0.004∗∗ −0.003∗ −0.005∗∗∗ −0.005∗∗∗
[0.003] [0.002] [0.002] [0.002] [0.002]
Market-to-book 0.002∗∗∗ 0.002∗∗∗ 0.002∗∗∗ 0.002∗∗∗ 0.002∗∗∗

[0.001] [0.001] [0.001] [0.001] [0.001]
Cash flow 0.009∗∗ 0.009∗∗ 0.008∗∗ 0.009∗∗ 0.009∗∗
[0.003] [0.003] [0.004] [0.004] [0.003]
CEO age (/100) 0.001 −0.003 −0.003 < 0.001 −0.001
[0.005] [0.005] [0.006] [0.005] [0.006]
Female −0.001 −0.001 −0.002 −0.001 −0.001
[0.003] [0.003] [0.003] [0.003] [0.003]
MBA degree 0.003∗∗ 0.002∗∗ 0.002∗ 0.002∗∗ 0.002∗∗
[0.001] [0.001] [0.001] [0.001] [0.001]
Equity-based compensation 0.003∗ 0.003∗ 0.003∗ 0.003∗ 0.003∗
[0.002] [0.002] [0.002] [0.002] [0.002]
N. Obs. 34,954 30,712 32,683 33,018 29,226
R2 0.662 0.660 0.663 0.661 0.665
This table presents evidence on the relation between the professional experience of the CEO and firm–level
financial policies. In panel A, the dependent variable is the ratio of short-term plus long-term debt to book assets.
In panel B, the dependent variable is the ratio of cash reserves to book assets. In panel C, the dependent variable
is the ratio of capital expenditure to book assets. The key variable of interest is Professional experience, defined
as an indicator equal to 1 if the CEO worked at another firm that experienced difficulties. We use four measure of
difficulties based on bankruptcy filings, bond ratings downgrades, adverse cash flow shocks, and adverse shocks
to the firm’s annual stock return. We also calculate a composite index of Professional experience, defined as the
maximum of these measures. All variable definitions are given in the Appendix. All the regressions include year
and firm fixed effects. The standard errors (in brackets) are heteroscedasticity consistent and clustered at the firm
level. Significance levels are indicated as follows: * = 10%, ** = 5%, *** = 1%.
The results in Panel A indicate a negative relation between leverage

and CEOs’ professional experience of distress, as captured by the variable
Professional experience. This relation is consistently negative and significant
across all measures of distress. The economic magnitudes are substantial and
comparable in size across all columns: experiencing distress is associated with a
1.5- to 2.8-percentage-point decline in the firm’s leverage ratio. For a manager
overseeing a firm with mean characteristics, this effect is associated with a
reduction of 7–13% in debt.
An analysis of the other control variables shows that, consistent with Frank
and Goyal (2009), there is a positive relation between leverage and size,
tangibility, and industry leverage, and a negative relation between leverage
and profitability. We also find that male CEOs, CEOs with an MBA degree,
and CEOs with more equity-based compensation have higher leverage ratios.
These findings are consistent with greater risk-taking by male CEOs and a
greater reliance on external finance due to financial literacy following an MBA
degree. Finally, these results suggest that risk-taking incentives resulting from
a CEO’s compensation structure predict debt.
578
Panel B of Table 3 presents the results for a firm’s cash savings policy,
measured as cash and short-term assets divided by total assets. The regressions
include firm-level proxies for the precautionary savings motive, the predomi-
nant motivation to hold cash based on Keynes (1936) and Miller and Orr (1966).
The empirical predictions of this theory suggest that firms with higher cash
flow volatility, better investment opportunities, and lower credit ratings will
hold more cash. Opler et al. (1999), Almeida, Campello, and Weisbach (2004),
Bates, Kahle, and Stulz (2009), Lins, Servaes, and Tufano (2010), Campello et
al. (2011), and others all find empirical support for the precautionary savings

motive. We also control for the firm’s size because prior research (e.g., Opler
et al. 1999) shows there are economies of scale in cash policy.
The empirical results in Panel B show a positive relation between cash
savings and CEOs’ professional experience. This relation is consistently
significant across all measures of distress. The economic magnitudes are
nontrivial: professional experience of distress is associated with a 1.1- to 2.6-
percentage-point increase in the firm’s cash savings. For a manager overseeing
a firm with mean characteristics, this effect is associated with an increase of
5.0–11.8% in cash holdings.
As expected, an analysis of the other control variables suggests that firms with
higher cash flow volatility, cash flows, and market-to-book ratios (our proxy
for investment opportunities), as well as smaller firms, hold more cash. These
results are consistent with precautionary savings motive and with previous
research (e.g., Opler et al. 1999). We also find that younger CEOs, female
CEOs, and CEOs with less equity-based compensation tend to hold more cash.
Under the view that cash is negative debt, these results are uniformly consistent
with the findings in Panel A.
Panel C of Table 3 analyzes the effect of a CEO’s professional experience
on a firm’s investment policy, as measured by the ratio of capital expenditures
to book assets. The regressions control for firm-level investment opportunities,
as measured by the market-to-book ratio, and cash flows. The estimates
suggest that capital expenditures are negatively associated with professional
experiences of distress. The effects are consistently negative and significant
across all measures. The economic magnitudes show that professional
experience of distress is associated with a 0.3- to 0.6-percentage-point decline
in the firm’s capital expenditures. For a manager overseeing a firm with mean
characteristics, this effect is associated with a reduction of 5–10% in capital
expenditures. An analysis of the control variables indicates that firms with
higher investment opportunities and more cash flow invest more in capital
expenditures. We also find modest evidence that CEOs with an MBA or CEOs
that have more equity-based compensation invest more.
Taken together, our evidence shows that a manager’s experience at distressed
firms captures a significant effect beyond the firm-, industry-, and market-
level determinants of corporate policy, controlling for a wide range of CEO
characteristics that may influence her incentives and preferences.
579
2.2 CEO turnover

The above analysis uses the full sample of firms for which we have
full employment data and includes firm fixed effects to control for time-
invariant unobservable characteristics that could be correlated with the CEO’s
professional experience and the firm’s financial and investment policy. To
further capture the causal effect of the CEO’s professional experience on
corporate policy, we focus on CEO turnovers, a setting in which the firm
experiences a shock to the experience of its CEO. An important issue in this
analysis is that some CEO turnovers may be driven by a change in the firm’s

investment opportunities, the poor performance of the departing CEO, or other
potential determinants of the firm’s corporate policy, which may confound our
tests. The main concern is that the CEO’s professional experience is irrelevant
because any new CEO (regardless of her experience) would have implemented
the new conservative policies given the change in firm characteristics.
To mitigate this concern, we use a subset of CEO turnovers that are unlikely to
be associated with managerial performance or a change in the firm’s conditions.
In particular, we focus on the CEO turnovers that meet one of the following
terms:
(i) The departing CEO dies, departs due to health-related reasons, or is at
least 60 years old.
(ii) The CEO turnover is part of the firm’s succession plan.
These turnovers occur either unexpectedly or as part of the firm’s management
succession plan, and hence are unlikely to be caused by changes in the firm’s
conditions that may warrant a change in its corporate policies. To classify
CEO turnovers, we follow the approach of Huson, Parrino, and Starks (2001)
and read the article in the Wall Street Journal and the firm’s press release
associated with the CEO change for the specific reasons given for the turnover.
We also collect information on the CEO’s age at the time of the turnover from
BoardEx. We find that 67.3% of CEO turnovers in our sample satisfy these
criteria, consistent with the frequency of voluntary CEO turnovers estimated
in the literature (e.g., Yermack 2006; Falato, Li, and Milbourn Forthcoming;
Jenter and Kanaan 2015).
These criteria focus our analysis on exogenous CEO turnover. However, to
ensure that we capture truly exogenous turnovers we also employ a stricter
definition. To do this, for all CEOs that meet one of these criteria, we collect
additional data on the details of their succession plan and refine our definition
of exogenous turnover to ensure that the CEO either (i) departed as part of a
succession where the date of departure was announced in public at least one
year prior to her departure, (ii) departed due to health reasons (including death),
or (iii) retired at 65 or later.7 By purging the announcement of the succession
7 In subsequent tests, we further refine our definition to require a retirement age of 70 years old and find similar
results.
580
plan’s date of departure at least one year back, we ensure that the turnover is not
a result of changes in firm attributes during the year preceding the turnover.8
By increasing the retirement date to 65 or even 70, it becomes more likely that
the manager departs due to exogenous, age-related considerations, rather than
for company- or policy-related reasons.
Another way to mitigate this concern is to focus on the subset of internal
turnovers, in which the new CEO was already an employee of the firm before
she was appointed as CEO. In this setting, the choice of the CEO is less likely
to reflect major changes due to changes in underlying conditions.

Table 4 reports estimates from the following two regression models for the
three sets of CEO turnovers (exogenous succession/health/age-related CEO
turnovers, more strictly defined exogenous turnovers, and internal turnovers):
(ii) firm fixed effects panel regressions that only include firms whose CEOs
turned over during our sample period; and (ii) difference regressions that
compare the financial policy two years prior to the turnover of the CEO and two
years after the turnover. The dependent variable in the fixed effects model is the
firm’s debt, cash, or investment, deflated by book assets. To address the concern
that the effects are driven by changes in the denominator (book assets) rather
than the numerator (corporate policy), we estimate the difference regressions
using the percentage change in corporate policy, which is not deflated by book
assets.
In both regression models, we exclude the three-year window surrounding
the turnover (i.e., we exclude the turnover year and the year that immediately
precedes and immediately follows the turnover year) to mitigate the potential
effects of the upheaval surrounding CEO turnover. For brevity, we present only
the analysis using the composite index of professional experience. In columns
1–3 of each panel, the key independent variable is the composite index of the
professional experience of the newly appointed CEO. In columns 4–6, the key
independent variable is the change in the index of professional experience of
the CEO resulting from the turnover.9 As in the previous tables, all of the
regressions include CEO-, firm-, industry-, and market-level determinants of
each of the corporate policies, which are not presented to conserve space.
Similar to the index of professional experience, columns 1–3 include the control
variables in levels and columns 4–6 include them in differences from two years
before the turnover to two years after the turnover. As before, the standard
errors are clustered at the firm level.
8 Based on the stricter definition of CEO turnovers, we identify a total of 537 turnovers. Of these 537 turnovers,
128 are due to a succession plan whose date of departure is announced at least a year in advance, 96 are due
to health issues, and the remaining 313 are retirements at the age of 65 or older. In unreported tests, we obtain
similar results after excluding succession plans altogether from the set of exogenous turnovers.
9 The change in the CEO’s professional experience equals 1 if the new CEO experienced difficulties and the
departing CEO did not, 0 if both CEOs either experienced or did not experience difficulties, and −1 if the new
CEO did not experience difficulties whereas the departing CEO did.
581
Table 4
Exogenous CEO turnovers
Panel A: Exogenous CEO turnovers
Specification Firm fixed effects Changes around CEO turnovers
Dependent Leverage Cash Capital Cash Capital
variable holdings expenditure Leverage holdings expenditure
Model (1) (2) (3) (4) (5) (6)
Professional experience −0.009∗∗ 0.028∗∗∗ −0.005∗∗ −0.016∗∗ 0.025∗∗ −0.006
[0.004] [0.009] [0.002] [0.007] [0.012] [0.004]
Controls Yes Yes Yes Yes Yes Yes

Year fixed effects Yes Yes Yes Yes Yes Yes
N. Obs. 8,462 8,462 8,462 976 976 976
R2 0.149 0.811 0.623 0.136 0.048 0.019
Panel B: Exogenous CEO turnovers: Stricter definition
Professional experience −0.015∗∗∗ 0.020∗∗ −0.004∗∗ −0.016∗∗ 0.018∗∗∗ −0.005∗
[0.006] [0.009] [0.002] [0.007] [0.006] [0.003]
N. Obs. 6,377 6,377 6,377 537 537 537
R2 0.603 0.828 0.618 0.185 0.092 0.028
Panel C: Internal CEO turnovers
Professional experience −0.008∗∗ 0.026∗∗ −0.004∗∗ −0.014∗∗ 0.025∗∗∗ −0.009∗
[0.004] [0.012] [0.002] [0.007] [0.006] [0.005]
N. Obs. 10,081 10,081 10,081 1,228 1,228 1,228
R2 0.163 0.828 0.641 0.135 0.053 0.018
This table presents estimates from fixed effects and first-difference regressions surrounding exogenous CEO
turnovers. Professional experience is measured by the composite Index of professional experience. Panel A
corresponds to exogenous turnovers in which the CEO departed as part of a succession plan, departed due to
health reasons (including deaths), or retired at the age of 60 or older. Panel B uses a stricter definition of exogenous
turnovers in which the CEO departed as part of a succession plan whose date of departure was announced at least
one year ahead, due to health reasons (including deaths), or retired at the age of 65 or later. Panel C includes
internal turnovers in which the new CEO came from inside the firm. All variable definitions are given in the
Appendix. All the regressions include the same controls as in Table 3, which are not shown. The standard errors
(in brackets) are heteroscedasticity consistent and clustered at the firm level. Significance levels are indicated as
follows: * = 10%, ** = 5%, *** = 1%.
The results across all panels of Table 4 show that when a new CEO that
experienced distress is appointed as CEO, the firm reduces its debt, increases its
cash savings, and cuts its investment in capital expenditures. These results hold
across both regression models and for all subsets of CEO turnovers, and they
are statistically significant at conventional levels in all cases except Column 6
of Panel A.
The economic magnitude of the impact of professional experience in the
turnover sample is similar across samples and models and is nontrivial: based
on the sample of exogenous CEO turnovers (Panel A) using the firm fixed
effects model, a newly appointed CEO who experienced distress reduces debt
by 0.9 percentage points, increases cash holdings by 2.8 percentage points,
and decreases capital expenditures by 0.5 percentage points. For a manager
582
overseeing a firm with mean characteristics, this effect is associated with a

reduction of 4% in debt, an increase of 13% in cash holdings, and a decrease
of 8% in investment.
Importantly, our empirical design and results exploit cross-sectional variation
within the subset of exogenous CEO turnovers. This empirical design differs
from Fee, Hadlock, and Pierce (2013), who show that, on average, exogenous
CEO turnovers are not accompanied by significant changes in a firm’s financing
or investment policies. In unreported tests, we follow Fee, Hadlock, and Pierce
(2013) and compare policy changes surrounding exogenous CEO turnovers and

policy changes in matching firms that did not undergo CEO turnover. Consistent
with Fee, Hadlock, and Pierce (2013), we find that corporate leverage, cash,
and investment policies do not change, on average, following exogenous CEO
turnovers.
Taken together, our findings indicate that although exogenous CEO turnovers
are not accompanied, on average, by significant policy changes, variation in the
CEO’s professional experience within the subset of exogenous turnovers does
affect corporate policy. Specifically, our results imply that exogenous turnovers
that result in a change in the experience of the CEO lead to substantial changes
in corporate policies relative to exogenous turnovers that do not result in a
change in the experience of the CEO.
For the remainder of the paper, we estimate our tests in the sample of stricter
exogenous CEO turnovers, using the firm fixed effects model. As noted above,
this specification controls for time-invariant firm characteristics that might be
correlated with professional experience and corporate policy, as well as changes
in firm characteristics that may trigger CEO turnover and be correlated with
the CEO’s professional experience and corporate policy.
2.3 Personal experience and overconfidence

Thus far, the analysis controlled for CEO characteristics, including gender,
education, compensation, and age. In addition to these traits, a number of papers
examine the impact of CEOs’ personal experiences on corporate decision-
making. Malmendier and Tate (2005) and Malmendier, Tate, and Yan (2011)
show that early personal experiences of managers, such as growing up during
the Great Depression and military service, affect corporate leverage and
investment. Additionally, several papers seek to measure CEO conservatism or
overconfidence directly, and explore its impact on corporate policy. Malmendier
and Tate (2005), Cronqvist, Makhija, and Yonkers (2012), Cain and McKeon
(Forthcoming), and Hutton, Jiang, and Kumar (2014) measure conservatism or
overconfidence based on the CEO’s option-exercising behavior, and whether
she has high levels of personal debt, holds a pilot’s license, or is a Republican.
The general finding is that more conservative managers implement more
conservative corporate policies, and, conversely, overconfident managers
pursue more aggressive policies.
583
To compare the impact of professional experience with factors considered

in prior work, Table 5 repeats the analysis controlling for a manager being in
the military or being born during the Depression era (Panel A), and for two
measures of overconfidence (Panel B).
Following Malmendier, Tate, and Yan (2011), we define an option-based
overconfidence indicator that equals one for CEOs who, at any point during
the sample period, hold an option even though the option is at least 40% in
the money. We define a second overconfidence indicator that compares the
number of media articles using the terms (i) “confident” or “confidence” or

(ii) “optimistic” or “optimism” to the number of past articles that portray the
CEO as (iii) not “confident,” (iv) not “optimistic,” or (v) “reliable,” “cautious,”
“conservative,” “practical,” “frugal,” or “steady.” We set the indicator equal
to one if (i) + (ii) >(iii) + (iv) + (v). We address possible bias due to
differential coverage by controlling for the total number of articles in the
selected publications.
For brevity, we present only the analysis using the composite index of
professional experience. The set of controls is similar to that in Table 3, with
the exception of the Great Depression analysis, which excludes the control
variable CEO age since it is highly correlated with growing up during the
Great Depression.
Panels A and B show that professional experience has an important effect
on corporate policy after controlling for CEOs’ personal experiences and traits.
The effect of professional experience remains both significant and of similar
importance as in the previous tables. Consistent with prior studies, Panel A
shows that growing up during the Depression or military experience influences
both financial and investment policies. In all specifications, professional
experience has a greater impact than personal experience. Panel B demonstrates
the importance of overconfidence in determining corporate policy.
Because professional experiences occur throughout a manager’s career, they
may attenuate or enhance the impact of her earlier personal experiences or
overconfidence. To test this, in Panel C we interact the manager’s professional
experience with these measures. We find that professional experience attenuates
the impact of overconfidence and enhances the impact of Depression-era
experience. Based on column 1 of Panel C, professional experience decreases
leverage by 2.6 percentage points, depression experience decreases leverage by
another 0.6 percentage points, and their interaction further decreases leverage
by 0.6 percentage points. As Panel C indicates, the interaction between
professional experience and Depression-era experience also significantly influ-
ences cash and investment policies, whereas the interaction between military
service and professional experience is insignificant. Finally, overconfidence
and professional experience have significant interactions on all three policies.
These findings are consistent with two possible interpretations: (i) the CEO’s
overconfidence weakens after experiencing distress, or (ii) the effect of the
584
Table 5
Professional Experience, Personal Experience, and Overconfidence
Panel A: Personal experience
Dependent variable Leverage Cash Capital expenditure
Model (1) (2) (3) (4) (5) (6)
Professional experience −0.017∗∗∗ −0.016∗∗∗ 0.019∗∗∗ 0.019∗∗∗ −0.004∗∗ −0.004∗∗
[0.005] [0.005] [0.006] [0.006] [0.002] [0.002]
Military experience 0.012∗∗ −0.010∗∗ 0.002∗
[0.006] [0.004] [0.001]
Depression experience −0.011∗∗ 0.012∗∗ −0.002∗
[0.005] [0.005] [0.001]

Firm fixed effects Yes Yes Yes Yes Yes Yes
N. Obs. 5,165 6,377 5,165 6,377 5,165 6,377
R2 0.611 0.608 0.834 0.833 0.622 0.625
Panel B: Overconfidence
[0.003] [0.005] [0.005] [0.005] [0.002] [0.002]
Overconfidence (options) 0.023∗∗ −0.010∗∗ 0.002∗
[0.010] [0.004] [0.001]
Overconfidence (media) 0.017∗∗ −0.014∗∗ 0.002
[0.007] [0.006] [0.002]
N. Obs. 3,858 4,251 3,858 4,251 3,858 4,251
R2 0.594 0.597 0.818 0.824 0.617 0.622
Panel C: Interactions
[0.007] [0.005] [0.004] [0.006] [0.002] [0.002]
Military experience 0.014∗∗ −0.008∗∗ 0.002∗
[0.005] [0.003] [0.001]
Military experience × −0.001 0.003 −0.001
Professional experience [0.003] [0.002] [0.002]
Depression experience −0.006∗∗ 0.009∗∗ −0.002∗
[0.003] [0.004] [0.001]
Depression experience × −0.006∗∗ 0.005∗∗ −0.002∗
Overconfidence (options) 0.019∗∗ −0.016∗∗ 0.003∗∗
[0.008] [0.007] [0.001]
Overconfidence (options) × −0.007∗∗ 0.005∗∗ −0.002∗
N. Obs. 5,165 3,858 5,165 3,858 5,165 3,858
R2 0.612 0.598 0.836 0.820 0.629 0.617
This table presents evidence on the relation between the professional experience, personal experience, and
overconfidence of the CEO. Professional experience is measured by the composite Index of professional experience.
Panels A and B estimate the effect of professional experience on corporate policy controlling for the CEO’s military
experience (an indicator that equals 1 if the CEO served in the military), Depression experience (an indicator
that equals 1 if the CEO grew up during the Great Depression), and overconfidence (based on option exercising
behavior and media coverage, see the Appendix for a detailed definition). Panel C estimates the interaction effects
of professional experience of distress and personal experience or overconfidence. All variable definitions are given
in the Appendix. The regressions are estimated in a sample of exogenous turnovers in which the CEO departed as
part of a succession plan (whose date of departure was announced at least one year ahead), departed due to health
reasons (including deaths), or retired at the age of 65 or later. All the regressions include year and firm fixed effects.
The standard errors (in brackets) are heteroscedasticity consistent and clustered at the firm level. Significance levels
are indicated as follows: * = 10%, ** = 5%, *** = 1%.
585
CEO’s overconfidence, rather than her overconfidence itself, weakens when

she experiences distress during her career.
3. Variation in Professional Experience

The above analysis shows that, on average, professional experience has a
causal effect on the financial and investment policies of a firm, controlling
for personal experiences and managerial traits. Thus far, we treat all
professional experiences equally. However, professional experiences can vary

in their timing, frequency, and saliency. In contrast, existing studies examine
personal experiences and managerial traits that typically do not vary along
these dimensions. We therefore exploit the variation in these attributes
across professional experiences to test several experimentally well-established
behavioral phenomena that have not been studied before in the context of
real-world decisions made by corporate executives.
3.1 Frequency and importance of professional experience

Professional experiences can be frequent, be recent, and occur during salient
periods of managers’ careers. Several theoretical and experimental studies
suggest that these factors may influence the impact of experience. Tversky
and Kahneman (1973, 1974) and Bordola, Gennaioli, and Shleifer (2012 a,b)
show that individuals infer the frequency or probability of an event based on
its saliency.
In Panel A of Table 6, we redefine the index of professional experience
to include only experiences that occurred when the manager was the CEO
(columns 1–3) or a top-five executive (columns 4–6) at another firm. In contrast,
the earlier analysis in this paper excluded experience as a CEO, and used
experience in all non-CEO roles, including lower-rank positions outside the
top-five executive suite. Compared with the earlier estimates (reported in
Table 4), professional experience as the CEO or a top-five executive has a more
dramatic impact on corporate policies. For example, professional experience
as a CEO (top-five executive) results in a 3.5- (2.7-) percentage-point decrease
in debt, compared with a 1.5-percentage-point decline associated with non-
CEO experience. These findings support the hypothesis that managers infer
the probability of an event based on its saliency and are thus more affected by
events that occur during important times in their career.
Another interpretation of these results is that the board of directors selects
CEOs with salient experiences of distress to implement more conservative
corporate policies. Under this view, the board is likely to have anticipated
the consequences of salient distress experiences, which took place when the
incoming CEO was a CEO or a top-five executive at a different firm. Thus, the
dramatic impact of salient experiences on corporate policies might reflect not
only choices made by the CEO, but also the selection of the CEO by the board
of directors to implement certain corporate policies.
586
Table 6
Variation in experience
Panel A: Experience as a top executive
Specification Experience as CEO Experience as a top-five executive
Dependent Leverage Cash Capital Leverage Cash Capital
variable holdings expenditure holdings expenditure
Model (1) (2) (3) (4) (5) (6)
Professional experience −0.035∗∗ 0.027∗∗∗ −0.007∗∗ −0.027∗∗∗ 0.023∗∗∗ −0.006∗∗
[0.011] [0.005] [0.003] [0.002] [0.005] [0.002]

N. Obs. 5,394 5,394 5,394 5,626 5,626 5,626
R2 0.632 0.819 0.648 0.641 0.805 0.644
Panel B: Number of experiences
Specification Single experience Multiple experiences
Model (1) (2) (3) (4) (5) (6)
Professional experience −0.012∗∗∗ 0.017∗∗ −0.003∗∗ −0.023∗∗∗ 0.026∗∗∗ −0.005∗∗∗
[0.004] [0.008] [0.001] [0.007] [0.008] [0.002]
N. Obs. 5,893 5,893 5,893 5,394 5,394 5,394
R2 0.607 0.825 0.617 0.602 0.834 0.622
Panel C: Recency
Specification Recent professional Distant professional
experience experience
Model (1) (2) (3) (4) (5) (6)
Professional experience −0.019∗∗∗ 0.024∗∗ −0.005∗∗ −0.012∗∗ 0.015∗∗ −0.003∗
[0.006] [0.009] [0.002] [0.005] [0.007] [0.002]
N. Obs. 5,612 5,612 5,612 5,612 5,612 5,612
R2 0.608 0.831 0.616 0.599 0.824 0.603
(continued)
We also examine the saliency hypothesis by investigating whether repeated

experience influences decision-making more than if it occurs only once. Our
primary measures of experience require a manager to have only one exposure
to distress. However, many managers experience multiple years of distress. In
our sample, 18.2% of the managers who experienced distress experienced them
more than once. To determine whether repeated experiences have a stronger
effect, Panel B of Table 6 compares the impact of having one year versus
multiple years of professional experience. Again, for brevity, we present only
587
Table 6
Continued
Panel D: Positive experience
Specification Positive Distress followed by a
experience positive experience
Model (1) (2) (3) (4) (5) (6)
Professional experience 0.003 −0.001 < 0.001 −0.013∗∗∗ 0.019∗∗∗ −0.004∗∗
[0.008] [0.005] [< 0.001] [0.003] [0.004] [0.002]

N. Obs. 6,377 6,377 6,377 5,208 5,208 5,208
R2 0.609 0.802 0.598 0.641 0.805 0.644
This table presents evidence on the relation between the professional experience of the CEO and corporate policies
(leverage, cash holdings, and capital expenditures). Professional experience is measured by the composite Index
of professional experience. Panel A extends the analysis to consider the effect of experiencing distress as the
CEO or a top-five executive. Panel B considers the effect of the number of experiences. Panel C investigates
the timing of the professional experience. Recent (Distant) experiences occurred more than six years (less than
six years) prior to the start of the CEO’s current position. (six years is the median number of years since a
CEO experienced distress. Panel D considers the effect of extreme positive professional experience, defined
analogously to professional experience of distress. The regressions are estimated in a sample of exogenous
turnovers in which the CEO departed as part of a succession plan (whose date of departure was announced at
least one year ahead), departed due to health reasons (including deaths), or retired at the age of 65 or later.
All variable definitions are given in the Appendix. The standard errors (in brackets) are heteroskedasticity
consistent and clustered at the firm level. Significance levels are indicated as follows: * = 10%, ** = 5%,
*** = 1%.
the results using the composite index but note that we obtain similar results for
all the measures of distress.
We find that the impact of experience is stronger when the managers have had
repeated experiences. The point estimates suggest that repeated experiences
are associated with a reduction of 2.3 percentage points in debt (compared
with 1.2 percentage points for the single-experience sample), an increase of
2.6 percentage points in cash savings (compared with 1.7 percentage points
for the single-experience sample), and a reduction of 0.5 percentage points
in capital expenditures (compared with 0.3 percentage points for the single-
experience sample). In unreported tests, we find that the differences between
these estimates are also statistically significant at the 5 percent level or better.
This finding further supports the saliency hypothesis, and it is also related to
recent work by Aktas, de Bodt, and Roll (2013), which shows that firms learn
through repeated acquisitions and this learning depends on the time between
successive transactions.
Next, we test whether more recent experience exerts a stronger impact
on corporate policy. The evidence on reinforcement learning suggests that
individuals will repeat positive outcomes and similar outcomes will be more
frequently employed (Erev and Roth 1998). This evidence is consistent with
Watson’s (1930) recency law that the event that was observed most recently is
more likely repeated.
588
In Panel C, we test the impact of the recency of the experience. To do

this, we divide the sample into instances where the manager had her most
recent experience of distress in the last six years (recent) and those where the
experience was more than six years ago (distant). We break the sample at six
years because this is the median number of years since an experience occurs in
the sample. Columns 1–3 present the impact of recent experience, and columns
4–6 present the impact of distant experience.
We find that experience with distress influences corporate policy regardless
of when it occurs.10 However, consistent with the recency hypothesis, we find

that the impact is stronger when the experience is more recent. Specifically,
a recent experience results in a 1.9-percentage-point decrease in leverage, a
2.4-percentage-point increase in cash, and a 0.5-percentage-point decrease
in investment, whereas distant experiences result in a 1.2-percentage-point
decrease in leverage, a 1.5-percentage-point increase in cash, and a 0.3-
percentage-point decrease in investment.
3.2 Negative versus positive professional experiences

Next, we consider the pessimism-bias hypothesis, which predicts that negative
outcomes will have asymmetrically stronger effects than positive outcomes.
Consistent with this hypothesis, Kahneman and Tversky (1979) document the
impact of loss aversion, and Kuhnen (2015) shows that negative outcomes
lead individuals to become overly pessimistic about possible investment
alternatives. We therefore examine if negative experiences have a stronger
effect than positive experiences. To determine whether this is the case, we create
an alternative professional experience measure to capture positive experiences.
Specifically, we sort firms based on changes in credit ratings, cash flows, and
stock returns, and determine if a firm falls in the top (as opposed to bottom)
decile of each measure. Similar to our definition of negative experience, we
further require that the firm’s credit is indeed upgraded, and that it experiences
positive cash flow changes and stock returns. We then create a composite index
that equals one if any of the three individual indicators equals one. Note that
the positive experience index does not consider an indicator for bankruptcy as
there is no upside equivalent.
The results are reported in the first three columns of Table 6, Panel D. We
find that positive professional experience does not affect corporate policy. This
finding is consistent with Kuhnen (2015) and shows that negative experiences
have a stronger impact than positive experiences, in support of the pessimism-
bias hypothesis.
10 Examining distant experiences also may mitigate selection bias in that more distant experiences may have less
impact on the choice of managers as CEO. This is similar to Schoar and Zuo (2013), who study the effect of the
economic conditions when the CEO enters the labor market on her subsequent career.
589
We further compare the impact of negative and positive experiences

by examining how mixed experiences influence managers. Specifically, we
examine whether positive experiences that follow negative ones attenuate or
reverse the impact of the negative experiences. These results are reported in
columns 4–6 of Panel D. We find that negative experiences have a dominant
effect, which is not significantly affected by subsequent positive experiences.
The point estimates in columns 4–6 are not materially different from our
baseline estimates in Table 4.

3.3 The professional experience of CFOs
So far the analysis has focused on the professional experience of the CEO.
The results indicate that CEO experience affects corporate policies, and allow
for two interpretations: (i) CEOs directly determine corporate policies, or
(ii) CFOs also determine corporate policies, but their decisions are positively
correlated with CEO traits. In this subsection, we distinguish between the two
interpretations by directly considering the effect of the professional experience
of the CFO. To measure these professional experiences, we use the same
methodology as in our main analysis.
To study the professional experience of CFOs, we recreate our measures of
professional experience at troubled firms for the 3,955 CFOs in our sample.
As Table 2 shows, we find that 0.6–11.1% of the CFOs in our sample were
previously employed by troubled firms.
In Table 7, we estimate fixed effect regressions in the sample of exogenous
CEO turnovers, similar to those in Table 4. The regressions examine the impact
of the professional experience of the CFO, controlling for the professional
experience of the CEO, a set of firm-, industry-, and market-level controls
similar to that in Table 3, and the characteristics of the CEO and the CFO.
We also include the interaction term CEO experience × CFO experience
to test whether the effects strengthen when both the CEO and the CFO
experienced distress. As before, the standard errors are clustered at the firm
level.
Columns 1–3 examine all exogenous CEO turnovers. In columns 4–6, we
focus on cases in which CEO and CFO turnovers are unrelated, by excluding
any instances where CFO turnovers occur within two years of CEO turnovers.
This empirical methodology allows us to exclude joint turnovers of the CEO
and the CFO that might be triggered by an overall change in the firm’s attributes
and therefore affect corporate policy regardless of the experience of the new
CEO and CFO.
The empirical results in Table 7 indicate that the firm’s financial policies,
leverage, and cash savings are affected by the professional experiences of both
the CEO and the CFO. These effects are statistically significant at the 5% level
or better, and the economic magnitudes imply that the effect of the CFO’s
professional experience is as important as that of the CEO’s experience. Based
on the sample that excludes joint turnovers, a CFO (CEO) with experience
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Table 7
CFOs’ professional experience
Turnovers Exogenous CEO Excluding joint turnovers
turnovers (within 2 years)
variable holdings holdings holdings expenditure
Model (1) (2) (3) (4) (5) (6)
CEO professional experience −0.019∗∗ 0.021∗∗ −0.004∗∗ −0.015∗∗∗ 0.017∗∗∗ −0.004∗∗
[0.008] [0.008] [0.002] [0.004] [0.007] [0.002]
CFO professional experience −0.012∗∗ 0.020∗∗ −0.001 −0.008∗∗ 0.019∗∗ < 0.001
[0.005] [0.008] [0.003] [0.003] [0.008] [0.001]

CEO x CFO professional −0.005 0.010∗ −0.003 −0.006∗ 0.012∗∗ −0.003
experience [0.005] [0.005] [0.002] [0.003] [0.005] [0.003]
CEO age (/100) 0.015 −0.082∗∗∗ −0.019∗∗∗ 0.009 −0.088∗∗∗ −0.020∗∗∗
[0.034] [0.009] [0.002] [0.043] [0.017] [0.000]
CEO female −0.002 −0.003 −0.001 −0.007 0.006 −0.006
[0.003] [0.011] [0.001] [0.005] [0.012] [0.007]
CEO MBA degree 0.018∗∗∗ −0.019 ∗∗ 0.010 ∗∗∗ 0.018 ∗∗∗ −0.014∗∗ 0.007∗
[0.005] [0.009] [0.000] [0.005] [0.006] [0.004]
CEO equity-based 0.141∗∗∗ −0.012 ∗∗∗ 0.018 ∗∗∗ 0.141 ∗∗∗ −0.011∗∗ 0.015∗∗∗
compensation [0.032] [0.005] [0.005] [0.038] [0.005] [0.001]
CFO age (/100) 0.010∗ −0.010∗∗∗ −0.011 0.004 −0.014∗∗∗ −0.007
[0.006] [0.004] [0.008] [0.008] [0.003] [0.008]
CFO female −0.008∗∗∗ 0.011 −0.006∗∗∗ −0.009∗∗∗ 0.015∗∗ 0.002
[0.003] [0.011] [0.002] [0.003] [0.007] [0.006]
CFO MBA degree 0.002 0.001 0.007 −0.003 −0.004∗∗∗ 0.004∗∗∗
[0.007] [0.003] [0.005] [0.008] [0.001] [0.001]
CFO equity-based 0.081∗∗ −0.006∗∗∗ 0.010∗∗∗ 0.083∗ −0.005∗∗∗ 0.013∗∗∗
compensation [0.035] [0.001] [0.004] [0.043] [0.000] [0.004]
N. Obs. 5,063 4,853 4,966 4,214 4,081 4,133
R2 0.638 0.855 0.679 0.635 0.858 0.680
This table presents evidence on the relation between the professional experience of both the CEO and the CFO
and corporate policies (leverage, cash holdings, and capital expenditures). Professional experience is measured
by the composite Index of professional experience. In Columns 1–3, we consider exogenous CEO turnovers
and the full sample of CFO turnovers. In Columns 4–6, we exclude cases in which the CEO and the CFO turn
over within two years of each other. All variable definitions are given in the Appendix. The standard errors (in
brackets) are heteroscedasticity consistent and clustered at the firm level. Significance levels are indicated as
follows: * = 10%, ** = 5%, *** = 1%.
replacing a CFO (CEO) without experience results in a 0.8% (1.5%) decrease

in leverage and 1.9% (1.7%) increase in cash. In contrast, the firm’s investment
policy is unaffected by the professional experience of the CFO. The results
in columns 3 and 6 suggest that only the professional experience of the CEO
affects the firm’s investment policy.
The interaction term CEO experience × CFO experience is statistically
significant at conventional levels in columns 2, 4, and 5. These findings
indicate that when both the CEO and the CFO undergo a similar distress
experience, there are compounding effects on financial policy, though the
economic magnitudes are small.
Throughout these tests, we control for characteristics of both the CEO and
the CFO. We find that CFOs and CEOs with high levels of equity-based
591
compensation have higher leverage, less cash, and more investment. We also
continue to find that CEOs with an MBA hold more debt, have less cash, and
invest more, consistent with our earlier findings.
These findings suggest that the professional experiences of the CEO and
the CFO have distinct effects on the firm’s financial policies. Our evidence on
CFOs’ professional experience complements recent studies that investigate the
influence of CFOs on firms’ financial policies. Using survey evidence on CFOs,
Ben-David, Graham, and Harvey (2013) show that CFOs’ forecasts about the
stock market and their own firm’s prospects are “miscalibrated,” and as a result,

their firms follow more aggressive corporate policies.Although we also find that
CFOs affect corporate policies, our results indicate that CFOs who experienced
distress in other companies tend to implement less aggressive policies relative to
other CFOs. Malmendier and Zheng (2012) show that both CEOs’ and CFOs’
overconfidence influences corporate decision-making. We complement their
work by studying the joint impact of CEOs’ and CFOs’ professional experience
on corporate policies.11
4. Robustness and Extensions

4.1 Robustness: Carrying policy from a previous firm
Our findings show that past distress experience influences corporate policy.
However, one potential concern with this interpretation is that the manager
may not be reacting to the experience, but, rather, may be carrying the policy
of her old firm to the new firm when she becomes the CEO. Under this
alternative view, the impact of the experience is not the primary determinant
of the policy.
To address this concern, we examine the difference in the policy from the
most recent firm at which the CEO experienced distress to the firm the CEO
is currently managing. The policy in the old, distressed firm is measured as
the average policy over the period when the CEO worked at her old firm prior
to the distress event. The policy in the new firm is measured as the average
policy over the tenure of the CEO at her new firm. The dependent variable is
the percentage change in the average policy (leverage, cash holdings, capital
expenditure) from the old firm to the new firm, and the control variables are
defined analogously as the percentage changes in the averages at the old and
new firms. As before, the regressions are estimated in a sample of exogenous
turnovers in which the CEO departed as part of a succession plan (whose date
of departure was announced at least one year ahead), departed due to health
reasons (including deaths), or retired at the age of 65 or later.
11 A related question is whether a CEO who experiences distress is more likely to appoint a CFO with a similar
experience. In untabulated tests, we examine but do not find evidence that a CEO who experienced distress is
more likely to appoint a CFO who also experienced distress.
592
The results are presented in Table 8. In the first three columns, we examine
experience in non-CEO roles, as we have in the majority of our tests. We
find that a manager who experienced distress will implement a policy that
has less debt, more cash, and less investment than the most recent firm at
which she was employed when she experienced distress. The differences are
statistically significant at the 1% level and economically important. At the new
firm, leverage is lower by 2.3 percentage points, cash is higher by 1.6 percentage
points, and investment is lower by 0.6 percentage points.
In previous analyses, we found that the experience that occurred when the

manager was a CEO at another firm is particularly influential. Columns 4–6
therefore repeat the analysis using only experience that occurred when the
manager was a CEO, with similar results. Finally, columns 7–9 report the
results for a modified professional experience index that excludes bankruptcy
experience. By excluding bankruptcy experience, we mitigate the concern that
the effects are driven by bankruptcy events, which tend to be more extreme,
potentially involve policy changes outside the control of the CEO, and may
affect the CEO’s future career prospects. As columns 7–9 show, the results are
virtually unchanged when we exclude bankruptcy experience.12
Taken together, these findings indicate that the manager is not merely
carrying the policy of the previous firm to the new firm; rather, she is
implementing a new policy at her new firm, which is affected by her professional
experience.
4.2 Professional experience, performance, and corporate governance

The evidence thus far may be consistent with either an efficient or an inefficient
explanation. If CEOs who experienced distress in the past overestimate the
likelihood and adverse implications of distress, as implied by the “hot stove”
effect described in Denrell and March (2001), they might be more conservative
than is optimal in order to hedge against distress. On the other hand, if CEOs,
in general, are overconfident and underestimate risk, then the conservatism
of CEOs who experienced distress may push firms’ policies closer to their
optimum. The view that managers are in general overconfident is consistent
with the hubris hypothesis introduced by Roll (1986) and with recent evidence
provided by Ben-David, Graham, and Harvey (2013).
In this section, we seek to distinguish between these hypotheses in two
ways. First, we investigate the impact of professional experience on firm
performance and value. Second, we examine the relation between corporate
governance and the impact of professional experience on corporate policy. If
professional experience fuels over-conservatism, it is likely to correspond to
lower performance and value, and have a stronger effect in poorly governed
12 A remaining concern is that a CEO was already influenced by prior distress experiences that occurred prior to
her most recent experience. To address this concern, in unreported tests, we repeat the analyses after excluding
CEOs that have experienced distress at multiple firms, and find similar results.
593
594
Table 8
Change in policy across firms
Specification Experience as non-CEO Experience as CEO Experience excluding bankruptcy
Dependent Leverage Cash Capital Leverage Cash Capital Leverage Cash Capital
variable holdings expenditure holdings expenditure holdings expenditure
Model (1) (2) (3) (4) (5) (6) (7) (8) (9)
Professional experience −0.023∗∗∗ 0.016∗∗∗ −0.006∗∗∗ −0.014∗∗ 0.019∗∗∗ −0.006∗∗ −0.020∗∗∗ 0.018∗∗ −0.005∗∗
[0.005] [0.004] [0.001] [0.006] [0.005] [0.002] [0.005] [0.009] [0.002]
Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes
N. Obs. 537 537 537 483 483 483 483 483 483
R2 0.086 0.105 0.021 0.086 0.099 0.019 0.085 0.098 0.020
This table examines the change in policy from the most recent firm in which the CEO experienced distress to the CEO’s current position. The policy in the old, distressed firm is measured
as the average policy prior to the distress event when the CEO worked at her old firm. The policy in the new firm is measured as the average policy over the tenure of the CEO at her new
firm. The dependent variable is the percentage change in the average policy (leverage, cash holdings, capital expenditure) from the old firm to the new firm, and the control variables are
defined analogously as the percentage changes in the averages at the old and new firms. Professional experience is measured by the composite Index of professional experience. The
regressions are estimated in a sample of exogenous turnovers in which the CEO departed as part of a succession plan (whose date of departure was announced at least one year ahead),
departed due to health reasons (including deaths), or retired at the age of 65 or later. All variable definitions are given in the Appendix. Columns 7–9 repeat the analysis with a modified
professional experience index that excludes bankruptcy experience. The standard errors (in brackets) are heteroscedasticity consistent and clustered at the firm level. Significance levels
are indicated as follows: * = 10%, ** = 5%, *** = 1%.
Table 9
CEOs’ professional experience and firm performance or value
Dependent Abnormal Abnormal Industry- Tobin’s ROA
variable returns— returns—Fama adjusted q (%)
market and French returns
model three-factor
model
Model (1) (2) (3) (4) (5)
Professional experience −0.003 −0.002 −0.002 −0.124∗∗∗ −0.120∗∗
[0.004] [0.004] [0.003] [0.030] [0.054]

Firm fixed effects No No No Yes Yes
N. Obs. 386 386 386 6,377 6,377
R2 0.028 0.025 0.026 0.514 0.535
This table presents evidence on the relation between the professional experience of the CEO and: (i) the
announcement return surrounding the appointment of the CEO, and (ii) the value or performance of the firm as
measured by Tobin’s q and ROA. ROA is measured as a percent. Professional experience is measured by the
composite Index of professional experience. The regressions are estimated in a sample of exogenous turnovers
in which the CEO departed as part of a succession plan (whose date of departure was announced at least one
year ahead), departed due to health reasons (including deaths), or retired at the age of 65 or later. All variable
definitions are given in the Appendix. The standard errors (in brackets) are heteroskedasticity consistent and
clustered at the firm level. Significance levels are indicated as follows: * = 10%, ** = 5%, *** = 1%.
firms. On the other hand, if professional experience mitigates overconfidence

and the miscalibration of risk, it will correspond to higher performance and
value, and have a stronger effect in well-governed firms.
In Table 9, we investigate the relation between the professional experience of
the CEO and firm performance or value. We do so in a number of ways. First, we
hand-collect data on the announcement dates of CEO turnovers for the sample of
exogenous turnovers. We are able to collect these data for 386 turnovers, which
compose 72% of the exogenous turnovers in our sample. We then calculate
abnormal announcement returns around these exogenous turnovers and regress
them on the professional experience index and year dummies. We calculate one-
day abnormal returns using the market model (column 1), the Fama and French
three-factor model (column 2), and relative to the value-weighted industry
portfolio, where industry is defined based on the Fama and French 48 industry
classification (column 3). Across all three columns, we do not find a significant
effect of the CEO’s professional experience on the returns surrounding her
appointment announcement.
In columns 4 and 5 of Table 9, we estimate firm fixed effects regressions
explaining the firm’s Tobin’s q (column 4) and ROA (column 5). We find
that both Tobin’s q and ROA are negatively related to the CEO’s professional
experience. These effects are statistically significant at the 5% level or better and
are economically important. The estimates imply that a CEO who experienced
distress corresponds to a decline of 12 basis points in ROA and 5.5% in
Tobin’s q.
While these results are inconclusive, they provide suggestive evidence
that CEOs with distress experience reduce firm value by enacting overly
595
conservative leverage, cash, and investment policies, which lead to tax shield
losses and forgoing positive net present value investments. These effects,
however, are not anticipated by investors when these managers are appointed
as CEOs.
In Table 10, we seek to provide additional evidence on the implications
of professional experience for efficiency by studying the effects of corporate
governance. We use a number of corporate governance measures to gauge the
severity of the firm’s agency problems. In particular, we include the E-Index
(Bebchuk, Cohen, and Ferrell 2009) of antitakeover provisions, where a higher

index level indicates weaker governance. We also consider large shareholder
monitoring. We define a blockholder indicator that equals one if an institutional
investor holds 5% or more of the firm’s outstanding shares and zero otherwise.
Finally, we also consider the impact of the board of directors using board
independence, where less independent boards represent weaker governance.
We measure board independence as the ratio of the number of independent
directors to the total number of directors.
In addition, we calculate a corporate governance index that combines
the three governance measures. To maintain consistency across the three
measures, we use the negative of the E-index, such that across all three
measures, higher values correspond to better corporate governance. We define
the index as the average of a firm’s percentile ranking in the sample according
to each measure. We then scale the index to range from 0 (low) to 1
(high).
Table 10 presents the results of the governance regressions, estimated, as
before, in the sample of exogenous turnovers. The dependent variable is one
of the firm’s policies (leverage, cash savings, and investment). For brevity, we
report the results for the composite index of professional experience, but the
results persist across the individual measures of professional experiences. The
independent variable of interest is the interaction term between the composite
index of professional experience and corporate governance. This term captures
whether the association between professional experiences and corporate policy
varies with the quality of corporate governance. Other independent variables
include the index of professional experience, corporate governance, and the
same set of controls as in our main analysis. As before, we cluster the standard
errors at the firm level. Due to data availability, our sample size decreases when
we use different governance measures.
The results in Table 10 indicate that professional experience remains
significant with similar economic magnitudes after controlling for governance.
Based on the interaction term in columns 1–3, which correspond to the
composite index of corporate governance, the impact of professional experience
on corporate policy is stronger in poorly governed firms. These effects are
statistically significant at the 10% level or better, and are economically
meaningful. A decrease of one standard deviation in the quality of corporate
governance, as measured by a composite index of these three governance
596
Table 10
CEOs’ professional experience and corporate governance
Dependent Leverage Cash Capital Leverage Cash Capital Leverage Cash Capital Leverage Cash Capital
variable holdings expenditure holdings expenditure holdings expenditure holdings expenditure
Measure of governance Governance index E-index Block holder Board independence
Model (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
Professional experience −0.021∗∗∗ 0.017∗∗∗ −0.004∗∗ −0.019∗∗ 0.016∗∗∗ −0.004∗∗ −0.020∗∗∗ 0.018∗∗∗ −0.004∗∗ −0.024∗∗∗ 0.020∗∗∗ −0.005∗∗
[0.006] [0.005] [0.002] [0.009] [0.005] [0.002] [0.006] [0.005] [0.002] [0.007] [0.004] [0.002]
Governance −0.006 0.014∗∗ 0.001 0.001 −0.002∗ 0.001 0.006 0.009∗ −0.001 −0.014 0.023∗ 0.002
[0.006] [0.006] [0.004] [0.001] [0.001] [0.001] [0.005] [0.005] [0.002] [0.009] [0.012] [0.008]
Professional experience 0.010∗∗∗ −0.013∗∗∗ 0.002∗ −0.002 0.004∗ −0.001 0.006∗ −0.011∗∗ 0.001 0.011∗ −0.020∗∗ 0.006
× Governance [0.003] [0.004] [0.001] [0.003] [0.002] [0.002] [0.003] [0.005] [0.003] [0.005] [0.008] [0.009]
Controls Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Year fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
Firm fixed effects Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
N. Obs. 5,203 5,203 5,203 4,755 4,755 4,755 4,926 4,926 4,926 5,203 5,203 5,203
R2 0.611 0.854 0.633 0.583 0.841 0.611 0.592 0.837 0.615 0.599 0.846 0.624
This table presents evidence on the relation between corporate governance, the professional experience of the CEO, and firm-level financial policies (leverage, cash holdings, and capital
expenditures). Professional experience is measured by the composite Index of professional experience. The key variable of interest is the interaction term: Professional experience ×
Governance. The regressions are estimated in a sample of exogenous turnovers in which the CEO departed as part of a succession plan (whose date of departure was announced at least
one year ahead), departed due to health reasons (including deaths), or retired at the age of 65 or later. All variable definitions are given in the Appendix. The standard errors (in brackets)
are heteroscedasticity consistent and clustered at the firm level. Significance levels are indicated as follows: * = 10%, ** = 5%, *** = 1%.
597
proxies, is associated with an increase of 18.6–29.8% in the effect of

professional experience.
We find directionally similar effects when we consider each of the governance
measures separately. The effects, however, are statistically weaker compared
with those of the governance index, likely because our tests lack power due
to the persistence of the individual governance measures across time coupled
with the inclusion of firm fixed effects in our tests.
The effects of corporate governance provide indirect evidence consistent
with a suboptimal explanation. Under this scenario, distress leads managers to

enact overly conservative policies when they are not monitored by the investors
and board of directors. These policies may result in value losses due to the loss of
value-increasing debt tax shields, forgoing valuable investment opportunities,
and holding excessive cash reserves. These effects also suggest that the changes
in corporate policies are unlikely to be driven only by the selection of the
CEO by the board of directors. If this were the case, we would expect to find
stronger effects in well-governed firms, where the CEO and the board work
together and the board has more control over CEO succession and corporate
policies.
5. Conclusion
We know relatively little about how managers’ professional experience affects
corporate policy. In this paper, we examine how prior employment at troubled
firms affects managers’ financial and investment decisions. Our findings
indicate that firms operated by CEOs who experienced distress at another firm
behave more conservatively: they have less debt, save more cash, and spend
less on capital expenditures.
Existing evidence focuses on early-life and personal experiences, whereas
our paper is the first to study the role of more recent professional experiences
throughout the manager’s career. This setting is an important source of
influence on managers’ decision-making because of the time proximity of
these experiences and their greater degree of relevance to the type of decision-
making required from corporate managers. In contrast to early-life experiences,
professional experiences vary in their timing, frequency, and saliency, and
therefore allow us to test whether these factors, which have been found to
be important in laboratory experiments, also have an impact on real-world
managerial decision-making. Our results indicate that ongoing professional
experiments—their timing, frequency, and saliency—are key determinants of
managers’ style.
Overall, our findings provide a possible explanation, rooted in the psychology
literature, for the differences in management style across corporate executives
who go through different experiences. They also suggest that management style
is not time-invariant or predetermined early in a manager’s life.
598
Appendix: Variable Definitions

Note: Compustat data items are given in parentheses.
A Firm-level variables
Blockholder is an indicator equal to one if an institutional investor holds 5% or more of the firm’s
outstanding shares and zero otherwise.
Board independence is the ratio of independent directors to total directors.
Cash holdings is cash plus short-term investments (che) divided by total assets (at).

Cash flow is earnings (ebitda) less interest and taxes (txt+xint), divided by total assets (at).
Capital expenditure is capital expenditure (capx) divided by total assets (at).
Leverage is total debt (debt in current liabilities [dlc] plus long-term debt [dltt]) divided by total
assets [at]).
E-Index is an alternative antitakeover index to the G-Index, which is based on a subsample of
relevant variables shown by Bebchuk, Cohen, and Ferrell (2009) to affect shareholder value.
Industry cash flow volatility is the ten-year rolling window median volatility of cash flow/assets
across the 48 Fama-French industries.
Industry Leverage is the average leverage ratio in a firm’s industry, where industries are defined
using the Fama-French 48 industry classification.
Market-to-book (or Tobin’s q) is the market value of assets, defined as total assets (at) minus book
equity (ceq) plus market value of equity (csho*prcc), divided by total assets (at).
Profitability is net income (ni) divided by total assets (at).
Size is the natural logarithm of the book value of total assets (at).
Tangibility is net property, plant, and equipment (ppent) divided by total assets (at).
X is (Xt −Xt−1 )/Xt−1 for each variableX (e.g., cash holdings, leverage, capital expenditure).
B Manager-level variables
Age is the number of years since the manager was born.
Depression Experience is an indicator equal to one if the manager grew up in the decade leading
to the Great Depression (CEOs born between 1920 and 1929).
Military Experience is an indicator equal to one if the manager served in the military.
Equity-based Compensation is the fraction of the manager’s total compensation paid in stock and
options grants.
Female is an indicator equal to one if the manager is a woman.
MBA degree is an indicator equal to one if the manager holds an MBA degree.
Overconfidence (options) is an indicator equal to 1 for managers who, at any point during the
sample period, hold an option even though the option is at least 40% in the money
Overconfidence (media) is an indicator that compares the number of media articles using the terms
(a) “confident” or “confidence” or (b) “optimistic” or “optimism” to the number of past articles
that portray the CEO as (c) not “confident,” (d) not “optimistic,” or (e) “reliable,” “cautious,”
“conservative,” “practical,” “frugal,” or “steady”. We set the indicator equal to 1 if (a) + (b) >(c) +
(d) + (e). We address possible bias due to differential coverage by controlling for the total number
of articles in the selected publications.
Professional experience (bankruptcy) is an indicator equal to one if the manager worked at a
firm that filed for chapter 11, excluding past employment as the CEO of the other firm.
Professional experience (bond ratings) is an indicator equal to one if the manager worked at a
firm that belonged to the lowest decile of Compustat firms based on annual credit ratings, excluding
past employment as the CEO of the other firm.
Professional experience (cash flow shocks) is an indicator equal to one if the manager worked at
a firm that belonged to the lowest decile of Compustat firms based on annual changes in operating
cash flows, excluding past employment as the CEO of the other firm.
599
Professional experience (stock returns) is an indicator equal to one if the manager worked at a
firm that belonged to the lowest decile of Compustat firms based on annual stock returns, excluding
past employment as the CEO of the other firm.
Professional experience (composite index) is the maximum of the five Experience variables:
Professional experience (bankruptcy), Professional experience (bond ratings), Professional
experience (Hadlock and Pierce), Professional experience (cash flow shocks), Professional
experience (stock returns) , excluding past employment as the CEO of the other firm.
Tenure is the number of years that the manager has been with the company.

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Looking in The Rearview Mirror The Effect of Managers' Professional Experience On Corporate Financial Policy

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Looking in the Rearview Mirror: The Effect

of Managers’ Professional Experience on

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A growing body of evidence suggests that managerial traits affect corporate

of real-world decisions made by corporate executives. We also examine how

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1. Sample and Data

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1.3 Measures of past professional experience

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Panel B: Frequency of professional experience

Panel C: Correlation between measures of CEO professional experience

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examine the impact of repetition in reinforcing an outcome, and of timing in

determinants of corporate policies, as well as unobservable time-invariant firm

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2. CEO Professional Experience and Corporate Policies

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The results in Panel A indicate a negative relation between leverage

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2.2 CEO turnover

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overseeing a firm with mean characteristics, this effect is associated with a

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2.3 Personal experience and overconfidence

To compare the impact of professional experience with factors considered

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CEO’s overconfidence, rather than her overconfidence itself, weakens when

3. Variation in Professional Experience

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3.1 Frequency and importance of professional experience

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We also examine the saliency hypothesis by investigating whether repeated

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In Panel C, we test the impact of the recency of the experience. To do

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3.2 Negative versus positive professional experiences

We further compare the impact of negative and positive experiences

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replacing a CFO (CEO) without experience results in a 0.8% (1.5%) decrease

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4. Robustness and Extensions

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4.2 Professional experience, performance, and corporate governance

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firms. On the other hand, if professional experience mitigates overconfidence

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proxies, is associated with an increase of 18.6–29.8% in the effect of

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Appendix: Variable Definitions

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