Survey evidence suggests most firms use the CAPM to estimate their cost of equity. Previous research has documented these estimates can be extremely imprecise. We study the impact of the precision of beta estimates on firm investment decisions, and find that firms with precise beta estimates invest closer to their expected levels. We employ quantile regressions to further examine the relationship between Beta Precision and investment levels and find that firms with more precise betas tend to avoid extremes in investment levels. Finally, we show that precision in the estimation of cost of equity is associated with higher risk-adjusted stock returns.

Numerous scholars have investigated the link between option-based compensation and innovation in public firms, generally concluding options motivate innovative activities better than alternative compensation methods. In most studies, the evidence of causality is weak or suffers from econometric concerns, leading to questions regarding the conclusions. We use the implementation of FAS 123R as a quasi-natural experiment to explore the role option compensation has in incentivizing innovation. FAS 123R increased the cost of granting options as compensation, resulting in a plausibly exogenous shift away from options. Using an updated sample of patent applications, we do not observe any decline in innovation. Despite a similar empirical design, our results differ from those of Mao and Zhang (2018), due to truncation bias inherent in their patent data. Overall, using our updated data, our findings are inconsistent with conclusions from prior studies and suggest option-based compensation does not drive innovation.