This study investigates how real activities management (RAM) by employees to meet internal targets set by managers affects their performance, and how managers' awareness of employees' opportunity to engage in RAM moderates this effect. Using two experiments, we predict and find that when managers are unaware of employees' RAM opportunity, employees who face miscalibrated targets use RAM to restore their own incentives to work hard, resulting in increased employee performance. Counter to conventional wisdom, we also predict and find that making managers aware of employees' RAM opportunity hurts employee performance. Such managers overestimate employees' RAM and adjust targets aggressively such that they become more difficult to achieve, leading to lower employee motivation and less trusting employee-manager relations. Overall, our findings show that the opportunity to engage in RAM can have the indirect benefits of motivating higher employee performance, but increasing managers' awareness of this has negative performance and relational effects.
Many tax-exempt hospitals generate substantial profits. At the same time, regulations governing tax-exempt status prohibit these organizations from issuing equity or operating for the benefit of private owners, leaving managers with unusual discretion over retained resources. This combination makes them especially prone to agency problems. Because hospitals play a central role in the U.S. economy, the costs of weak governance extend beyond the sector itself. We find that tax-exempt hospitals spend more on administrative wages and capital investments than comparable taxable hospitals. At the same time, weaker financial performance accompanies greater mission-related activity. A novel, hand-collected measure of additional state-level oversight reveals that stronger oversight disciplines finances without crowding out mission-related activity.
Theory suggests that changes in corporate tax rates can alter the dispersion of after-tax project payoffs, thereby altering the exposure of firm-level risk transmitted to executives through compensation. Using state tax changes, we observe firms shifting away from option-based compensation following state corporate tax rate increases. This result is concentrated in compensation contracts that lack relative performance evaluation (RPE) features, which filter common shocks to performance and influence the type of risk executives are incentivized to take. We also find that firms are more likely to initiate RPE shortly after a state tax rate increase and that firms that adjusted compensation through reductions in equity risk incentives or used RPE were less likely to experience a subsequent increase in systematic risk following a state tax rate increase. Overall, our findings provide novel insight into how taxes can influence CEO compensation design and the transmission of firm-level risk to executives.
The once binary make-or-buy choice in firms' sourcing has evolved in recent years into what is often a make-and-buy decision where the same input is both produced internally and procured externally. This paper presents a novel explanation for concurrent sourcing, one rooted in firms' strategic positioning and intrinsically tied to their capacity choices. In our setting, a firm that chooses solely to make internally maximizes cost savings but prices away efficiency gains via intense retail competition. A firm that chooses solely to buy externally tempers competitive tendencies but finds input prices excessive. By choosing concurrent sourcing, a firm keeps average costs low (relying on external supply sparingly) while also credibly committing to reining in aggressive retail pricing due to the modestly higher marginal costs associated with outsourcing. This optimal middle ground is achieved by the firm strategically limiting its installed capacity.
Government-controlled brokerage analysts serve as a market stabilization tool in China. Examining the 2005-2019 period, we show these analysts issue relatively more optimistic-yet less accurate and timely-forecasts during market rescue periods, supporting stock prices. During market booms, they issue comparatively pessimistic but more accurate and timely forecasts, tempering excessive optimism. These patterns are stronger for large firms and state-owned enterprises, and at the most government-influenced brokerages. Markets appear to respond to these forecasts: stocks with greater government-brokerage coverage experience higher liquidity during downturns but lower liquidity during hot markets, with corresponding post-earnings price adjustments. Our findings match Brunnermeier, Sockin, and Xiong's (2022) theoretical predictions: state interventions can erode information efficiency under intensive intervention while maintaining it under moderate intervention. Collectively, these results underscore that analysts can serve a dual role-as information providers and policy instruments shaping market expectations and stability-in a coordinated economy.
