Abstract
We analyze the association between managerial ability in banks and three different typologies of investments that demand significant resources: capital, research and development (R&D), and acquisition expenditures. We also analyze whether managerial ability is related to increased (reduced) investment in banks prone to underinvestment (overinvestment). The sample for analysis is composed of 877 observations of banks in nine countries over the period 2004–2010. We find evidence that more able bank managers select and implement investment projects more efficiently and confirm the upper echelon theory and resource-based view, which suggests that managers’ characteristics affect financial decisions. The findings are robust to alternative measures of investment efficiency. The evidence confirms that, after controlling for bank and country-specific institutional factors, managers’ abilities influence investment efficiency in banks in a significant way. This paper is a response to the calls for a further exploration of the roles that individual managers play in financial decisions and is the first empirical study to investigate this association in the international financial industry.
Highlights
Despite extensive empirical research on investment efficiency, the existing literature usually considers that variations in capital structure are mainly justified by firm, industry, and market-level characteristics (Myers and Majluf 1984)
When firms have an increasing tendency towards overinvestment, managerial ability tends to reduce the levels of research and development (R&D) and acquisition expenditures, as well as total capital investments
Our objective is to analyze the association between managerial ability in banks and three different types of investments that demand significant resources: capital expenditure, research and development (R&D) expenditure, and acquisition expenditure
Summary
Despite extensive empirical research on investment efficiency, the existing literature usually considers that variations in capital structure are mainly justified by firm, industry, and market-level characteristics (Myers and Majluf 1984). Studies in management fields provide evidence that managers’ backgrounds, personalities, and experiences affect how they face different situations and, in turn, the choices they make (Hambrick and Mason 1984; Barton et al 1992) This literature (upper echelon theory) highlights that managers’ individual attributes affect their understanding of firm situations and have an impact on how they make decisions (Hambrick 2007). From the resource-based view, managerial ability is a valuable resource with potential to enhance a firm’s competitive advantage (Holcomb et al 2009) Based on these theories, recent literature on economics and finance has explored whether managers have an idiosyncratic effect on firm decisions. One of the main contributions of this paper is the measurement of idiosyncratic managerial styles which are not necessarily related to any observable characteristic, such as their level of education
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