Observational learning and CEO decision-making – Evidence from labor strikes

Joint project with Thomas Schmid

SSRN: Link

Abstract:

This paper investigates how CEOs decision-making is affected by observational learning. We use a setting in which a CEO observes, as a director, how another CEO has to deal with a labor strike. For identification, we exploit the idiosyncratic nature of strikes and variations in their severity. Shortly after observing the strike, CEOs increase cash holdings by about one percentage points, and, in the long-term, they implement measures which decrease strike risk at their firms. Our results support a learning mechanism, but not irrational overreaction. Overall, observational learning seems to be an important mechanism behind the decision-making process in social networks.