When the market can observe the profitability of all projects with equal precision, then with stock compensation (1) the weight on any given project in managerial compensation is independent of the marginal productivity of effort in the project; (2) the projects that are the noisiest indicators of managerial effort receive the most weight in compensation; and (3) investors have the greatest incentive to collect information about projects that are the noisiest indicators of managerial effort. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

[When the market can observe the profitability of all projects with equal precision, then with stock compensation (i) the weight on any given project in managerial compensation is independent of the marginal productivity of effort in the project; (ii) the projects that are the noisiest indicators of managerial effort receive the most weight in compensation; and (iii) investors have the greatest incentive to collect information about projects that are the noisiest indicators of managerial effort.]

Individual investors trade less aggressively on any particular piece of information as more investors observe it. The trades of the new investors observing a piece of information 'crowd out'some of the trades of the old investors who observe that same piece of information. This paper shows that when traders are risk averse, these crowding out effects lead the proportions of traders who choose to observe one signal versus another to differ from the proportions that maximize the informativeness of prices.

ABSTRACT Individual investors trade less agressively on any particular piece of information as more investors observe it. The trades of the new investors observing a piece of information “crowd out” some of the trades of the old investors who observe that same piece of information. This paper shows that when traders are risk averse, these crowding out effects lead the proportions of traders who choose to observe one signal versus another to differ from the proportions that maximize the informativeness of prices.

Proponents of state antitakeover legislation argue that previous empirical tests by financial economists of the wealth effects of Pennsylvania's 1990 antitakeover law are biased. We show that the proponents are correct. In particular, firm size, event-time clustering, and non-synchronous trading effects account for the wealth decreases reported in earlier studies. We also show, however, that both proponents and critics of the Pennsylvania legislation have ignored the earliest press release about it. The wealth effect associated with this announcement is negative, large, and statistically significant. These results therefore are consistent with the hypothesis that the Pennsylvania law decreased company values and with the hypothesis that the initial market reaction is an unbiased estimate of the law's effect on firm values.

We examine the stock-price effects of all second-generation state takeover laws introduced from 1982 through 1987 for which we find press announcements. On average, the announcements are associated with a small but statistically significant decrease in the stock prices of firms incorporated in the state and of large firms headquartered in the state. The stock-price effects are concentrated in firms without preexisting firm-level takeover defenses. Firms with prior defenses have no significant stock-price reactions.

Shareholder-initiated proxy proposals on corporate governance issues became popular in the late 1980s as corporate takeover activity declined. We find firms attracting governance proposals have poor prior performance, as measured by the market-to-book ratio, operating return, and sales growth. There is little evidence that operating returns improve after proposals. The proposals also have negligible effects on company share values and top management turnover. Even proposals that receive a majority of shareholder votes typically do not engender share price increases or discernible changes in firm policies.