Financial Management 

Abstract: This paper attempts to measure difference in firm performance caused by broad composition and ownership structure. These two variables are intended to measure the direct incentives and monitoring faced by top management. We also control for a number of otheк variables that are likely to be correlated with corporate performance. We do so to improve the precision of our estimates, as well as to eliminate much of the omitted-variable bias that has undoubtedly affected previous studies of board composition.

Abstract: This paper develops a simple formula for approximating Tobin's q. The formula requires only basic financial and accounting information. Results of a series of regressions comparing our approximate q values with those obtained via Lindenberg and Ross' (1981) more theoretically correct model indicate that at least 96.6% of the variability of Tobin's q is explained by approximate q.

Abstract: Two dominant features emerge from a simple model of corporate finance with excessively optimistic managers and efficient capital markets. First, optimistic managers believe that capital markets undervalue their firm 's risky securities, and may decline positive net present value projects that must be financed externally. Second, optimistic managers overvalue their own corporate projects and may wish to invest in negative net present value projects even when they are loyal to shareholders. These results establish an underinvestmentoverinvestment tradeoff related to free cash flow without invoking asymmetric information or rational agency costs. In this paper, I explore the implications of a single specification of managerial irrationality in a simple model of corporate finance. Specifically, I focus on managerial optimism and its relation to the benefits and costs of free cash flow. Managers are "optimistic" when they systematically overestimate the probability of good firm performance and underestimate the probability of bad firm performance. This assumption finds support in a large psychological literature demonstrating that people are, in general, too optimistic. That literature presents two pervasive findings (e.g., Weinstein, 1980) that make optimism an interesting subject of study for corporate finance researchers. First, people are more optimistic about outcomes that they believe they can control. Consistent with this first experimental finding, survey evidence indicates that managers underplay inherent uncertainty, believing that they have large amounts of control over the firm's performance (see March and Shapira, 1987). Second, people are more optimistic about outcomes to which they are highly committed. Consistent with the second experimental finding, managers generally appear committed to the firm's success (somehow defined), probably because their wealth, professional reputation, and employability partially depend on it (e.g., Gilson, 1989). The approach taken here departs from the standard assumption of managerial rationality in corporate finance. Behavioral approaches are now common in asset pricing, of course, but little work in corporate finance has dropped the assumption that managers are fully rational.' This is somewhat surprising considering that the common objections to behavioral economics have less vitality in corporate finance than in asset pricing. The "arbitrage" objection (rational agents will exploit irrational agents) is weaker, because there are larger arbitrage bounds protecting managerial irrationality than protecting security market mispricing. The most obvious "arbitrage" of managerial irrationality-the corporate takeover-incurs high transactions costs, and the