We document that exogenous shocks to federal government spending due unexpected military conflicts significantly impact the scale and novelty of corporate R&D output. We provide evidence of a possible financing channel: Higher government expenditures significantly increase government borrowing. There is a corresponding decrease in private borrowing, suggesting an indirect crowding-out that reduces R&D investment and innovation. We further support the borrowing channel by demonstrating that exogenous increases in federal taxes reduce government borrowing and increase R&D. We also show that firms with lower credit ratings and lower profitability are affected more adversely. Finally, we find that patterns are accentuated when the corporate bond risk premiums are higher and mitigated for military-related industries. Our results reveal the adverse effects of government spending on long-term economic growth through its impact on corporate innovation.

Overconfident CEOs overestimate their ability to generate value. We investigate how this affects divestiture activity and whether it moderates a CEO's investment lifecycle. We hypothesize and find that overconfident CEOs are less likely to divest units and their divestment decisions are less sensitive to career lifecycle concerns. In addition, after a divestiture overconfident CEOs spend more on capital expenditures (Capex) and acquisitions than other CEOs. Overall, our results suggest that overconfident CEOs prefer to retain units and divest largely to maintain an investment trajectory. Our results further highlight the important role behavioral traits such as overconfidence play in corporate decision-making.

Do executives demand a premium for working in polluted environments? We develop a model of optimal CEO compensation and find empirical support for its prediction that pollution will induce a higher fixed wage, but lower incentive pay. This is the case even if we exclude polluting firms. We mitigate causality and identification concerns by (inter alia) using a quasi-natural experiment: the acid rain project. Consistent with the model, the impact of pollution increases with managerial bargaining power, as captured by CEO power, managerial ability, and outside opportunities. The latter is captured with the staggered passage of the inevitable disclosure doctrine.

Research on executive compensation finds unions to be associated with lower executive compensation, particularly incentive pay, while other work documents the role of compensation consultants in facilitating stronger CEO incentives and pay. We propose and test the implications of a simple theoretical framework that integrates these empirical findings. We find empirical support for our model's prediction that in environments less favorable to union organization (e.g., right-to-work states), firms with higher unionization rates strategically engage consultants to counter union influence, place greater value on their advice as gauged by consultant fees, and offer managers greater equity incentives opposed by unions. On the other hand, in strongly prolabor environments, unions are more successful at curtailing consultant use and have greater influence on the level of pay and incentives.

We investigate the information and strategic aspects of corporate tweets. Despite limits on message length, tweets stimulate information acquisition by investors, as indicated by post-tweet downloads from the SEC-EDGAR website. Corporations appear to be effective at leveraging tweets to enhance their information environment. Specifically, tweets are associated with reduction in firms’ earnings surprise and stock return volatility. There is a decrease in negative skewness of stock returns, suggesting a more uniform release of favorable and unfavorable news, especially in high litigation industries. These effects are more evident when the CEO has greater equity incentives and when firms are smaller and less visible.

We hypothesize and show that the impact of a regulatory shock depends both on the shock itself and on how firms respond, which can itself depend on the firm's governance attributes. To explore this, we use the staggered passage of Universal Demand (UD) laws, which insulate managers from derivative lawsuits. We find that, on average, firms respond to UD laws by increasing risk-taking incentives (vega), thereby compensating for weaker external discipline, and incentivizing valuable risky investments. Corporate governance, institutional ownership, and CEO power influences the likelihood of adjusting compensation. The firms that do boost vega subsequently experience greater innovation, and a stronger market response to new product announcements. Our results help to reconcile extant findings on the effects of UD laws by showing that the beneficial impact of the laws is conditional on firms’ strengthening their CEOs’ risk-taking incentives, a choice affected by their latent governance arrangements.

We examine the relation between directors’ gender and labor market outcomes following adverse corporate events: financial restatements, dividend omissions, and proxy contests. Directors in firms suffering adverse events lose external board seats, though female directors fare substantially better than male colleagues. This ‘female-advantage’ manifests in firms with non-gender-diverse boards and during periods of heightened public attention to gender-equality. The female-advantage has significant economic consequences: firms employing female directors from event firms experience greater negative abnormal returns compared to firms employing only their male counterparts. Our findings shed light on role of gender in the director labor market and firm value.

Stocks expected to be sold by distressed mega hedge funds (MHFs) face anticipatory institutional selling and increased short interest. However, no evidence of anticipatory trading is found in stocks held by nondistressed MHFs, distressed non-MHFs, or stocks confidentially held by distressed MHFs, suggesting that public portfolio disclosure by large and closely followed distressed investors, and not common investment signals, drives anticipatory trading. Distressed MHFs with greater exposure to such anticipatory trading suffer 2.21% lower style-adjusted returns. Stocks subject to anticipatory trading experience negative abnormal returns followed by reversals, indicating the price destabilizing effect of anticipatory trading.

We predict that firms’ attempts to reduce litigation risk can inadvertently worsen financial report readability by increasing reports’ size, complexity, and altering their linguistic characteristics. We find that litigation risk reduces report readability. Readability worsens after firms experience a securities class action. This persists for several years after lawsuit resolution. To alleviate endogeneity concerns, we show that the litigation experience of a firm's managers and directors at other firms impacts readability. We also find that firms adjust readability around litigation flashpoints. Using an SEC rule change as an exogenous shock, we show that adjustments to readability can moderate firm litigation risk.

We argue that institutional brokerage networks facilitate liquidity provision and mitigate the price impact of large non-information-motivated trades. Using commissions, we map trading networks of mutual funds (institutions) and their brokers. Central funds (institutions) tend to outperform their peripheral counterparts in terms of return gap (execution shortfall). This outperformance is more pronounced when funds experience large outflows and for large trades in less liquid stocks. Central brokers can deliver superior trade execution compared to peripheral brokers, but mainly for central institutions. We use the collapse of Lehman Brothers as a quasi-natural experiment to establish the likely causality of our findings.

We provide evidence on the effects of criminal/corrupt politicians on firm performance and investments in their constituencies. Using a regression discontinuity approach, we focus on close parliamentary elections in India to establish a causal link between election of criminal-politicians and firms’ stock-market performance and investment decisions. Election of criminal-politicians leads to lower election-period and project-announcement stock-market returns for private-sector firms with economic ties to the district. There is a significant decline in total investment and employment by private-sector firms in criminal-politician districts. Interestingly, decline in private-sector investment is largely offset by a roughly equivalent increase in investment by state-owned firms.

We explore the consequences of limiting executive pay on voluntary executive turnover by exploiting a Chinese government policy restricting executive pay at a subset of firms. Affected firms experience an increase in voluntary executive turnover, with executives increasingly moving to firms not bound by the pay policy. Executives that leave are of higher quality as suggested by their stronger stock and accounting performance in the year prior to the turnover. Affected firms suffer firm value losses, especially when talented executives leave. Our findings demonstrate the importance of compensation contracts in retaining executives and suggest a need for regulatory caution, since mandated constraints aimed at trying to “fix” executive pay can hurt firm value and ultimately, hurt shareholders. This paper was accepted by Suraj Srinivasan, accounting. Funding: S. Silveri acknowledges research support in the form of a summer research grant from the Fogelman College of Business and Economics at the University of Memphis. This research support does not imply endorsement of the research results by either Fogelman College or the University of Memphis. K. Wang is grateful for the financial support provided by the Tsinghua University Initiative Scientific Research Program and the research project of the Institute for State-Owned Enterprises, Tsinghua University. L. Zhao is grateful for the financial support provided by the Asia Research Center in Nankai University [Project AS2206]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4812 .

This paper uses the firm level gender diversity data to study the effects of workforce diversity on firm outcomes. Using a novel instrumental variable, women role models, we find that workforce gender diversity leads to an improvement in firm innovation and overall firm value. Importantly, we show that workforce diversity can lead to similar outcomes even when firms have low board diversity. We further show that gender diverse firms incur fewer and less serious employee violations and receive better social scores, suggesting the positive effects of workforce diversity on non-financial outcomes. We identify less unionization, higher employee productivity, and more woman researchers as potentially important channels through which women in the workforce impact firm innovation and value. Finally, using textual measures of culture and MeToo movement as an exogenous shock to firm culture, we show that the positive impact of gender diversity on firm outcomes is more pronounced in firms with a conducive organizational culture. Overall, our study is one of the first to provide evidence on the advantages of a diverse workforce.

Extending the results of Riddick and Whited (2009), we show that firms systematically dissave from liquid assets in response to negative cash flow. This dissaving behavior is consistent with firms' rational willingness to absorb negative productivity shocks and retain assets that could become productive in the future. Dissaving behavior significantly varies with the levels of financial constraints, cash reserves, cash flow uncertainty and losses. Our evidence is obtained within the integrated regression framework, in which the cash flow identity holds implicitly, and using both OLS and q measurement-error consistent estimators. Because a large and growing fraction of U.S. firms yield negative cash flow, the corporate propensity to dissave is a systematic phenomenon.

An extensive literature finds that CEO compensation, especially bonus pay, exhibits downward rigidity. This is despite corporate boards usually retaining the discretion to deviate from their stated bonus formulae. We conjecture that the infrequent occasions in which there is an unexpected bonus cut, the board likely possesses unfavorable private information about the firm's long-term prospects and the CEO's ability. We hypothesize, therefore, that unexpected bonus cuts will be predictive of the company's future operating performance as well as forced CEO turnovers. We first validate our private information premise by showing that stock market reactions to CEO firings or earnings announcements are muted for firms experiencing unexpected bonus cuts but not for those without cuts. Consistent with these predictions, we find that unexpected bonus cuts are robust predictors of subsequent underperformance (ROE) and lower firm valuation (Tobin's Q) as well as CEO firings. Further, we examine the impact of Regulation S-K (2006) and show that predictive power becomes stronger post Reg. S-K, along with the disappearance of downward rigidity. This suggests that compensation transparency makes it harder for boards to deviate from stated bonus formulae and, if they do, the deviations are more informative.

Research on executive compensation finds unions to be associated with lower executive compensation, particularly incentive pay, while other work documents the role of compensation consultants in facilitating stronger CEO incentives and pay. We propose and test the implications of a simple theoretical framework that integrates these empirical findings. We find empirical support for our model's prediction that in environments less favorable to union organization (e.g., right-to-work states), firms with higher unionization rates strategically engage consultants to counter union influence, place greater value on their advice as gauged by consultant fees, and offer managers greater equity incentives opposed by unions. On the other hand, in strongly prolabor environments, unions are more successful at curtailing consultant use and have greater influence on the level of pay and incentives.

We examine how stock liquidity affects acquisitions. We hypothesize that liquidity enhances acquirer stock as an acquisition currency, especially when the target is relatively less liquid. As hypothesized, we find that more liquid firms have a greater likelihood of making stock acquisitions. Further, the difference in stock liquidity between acquirer and target firms increases payment with stock, reduces acquisition premiums, and improves acquirer announcement returns in equity deals. Consequently, firms take steps to improve stock liquidity prior to stock acquisitions. We use policy initiatives as exogenous shocks to firm liquidity to show that liquidity effects on acquisitions are plausibly causal.

We hypothesize that gender-diverse boards manage CEO risk-taking preferences through the debt-like component of CEO compensation. We provide empirical evidence of a strong positive association between the proportion of independent female directors and debt-like pension compensation for a sample of US firms. Our key results are robust to a least-squares framework that includes firm fixed effects to address potential omitted variable bias, and we also find evidence that higher proportions of independent female directors are associated with lower CEO option compensation and more intensive use of restricted stock grants. We obtain corroborating results from a difference-in-differences approach using California's 2018 board gender quota law (SB 826) as a quasi-experiment. Consistently, gender-diverse boards reduce the cost of debt among firms that are closer to financial distress and for longer maturity bond issues.

We investigate how men and women fare in the managerial labor market in the plausibly exogenous circumstance of their firms being acquired when most target-firm managers (about 90%) are displaced. These career disruptions result in a larger drop in rank and compensation for female managers, despite similar job search attributes. Gender differences are mitigated when hiring firms have more women in upper-echelon positions. Rich managerial experience and external board service also reduce gender-related differences. Overall, results point to a (implicit) “gender penalty” in terms of managerial job mobility, but also indicate contexts in which penalty is alleviated, and even reversed.

Centrality in the network of interindustry trade relationships provides novel insights into an industry's economic attributes and managerial incentive contracts prevalent in the industry. More "central" industries trade with a large number of industries, implying numerous but relatively weaker interindustry ties. Weakness of interindustry ties suggests that relationship-specific investment (RSI) will be less important and output will be relatively more commoditized in central industries. As predicted, central industry firms are less innovative, face greater competition, and have lower idiosyncratic risk. Further, CEOs in central industries receive lower pay and weaker incentives. Tournament incentives are also weaker in more central industries.