This study examines the strategic use of corporate philanthropy programs to achieve financial reporting objectives. Corporate-sponsored foundations allow managers to maintain stable levels of giving to charitable causes while providing substantial discretion as to the amount of contribution expense recorded on the income statement in any given period. I find that firms reporting small earnings increases make income-increasing discretionary foundation funding choices. This result is associated with firms that have strong equity market incentives to manage earnings. The evidence presented in this paper is consistent with firms using their charitable foundations as off-balance sheet reserves.

Leone, Wu, and Zimmerman [Leone, A., Wu, J., Zimmerman, J., 2005. Asymmetric sensitivity of CEO cash compensation to stock returns. Journal of Accounting and Economics, forthcoming] find that cash compensation (salary and bonus) is more sensitive to price decreases than to price increases. The authors interpret this result as consistent with Boards of Directors exercising discretion to reduce costly ex post settling up in cash compensation. I discuss potential alternative explanations. Specifically, the design of bonus contracts and the placement of the upper bound, and the effect of the Internal Revenue Code Section 162 (m) that limits the deductibility of cash compensation over one million dollars. I also link their results to the managerial power and rent extraction perspective.

This paper examines the compensation of CEOs in China's listed firms. First, we discuss what is known about the setting of CEO compensation and then we go on to examine factors that may help explain variations in the use of performance related pay. In China, listed firms have a dominant or controlling shareholder and we argue that the distinct types of controlling shareholder have different impacts on the use of incentive pay. We find that firms that have a State agency as the major shareholder do not appear to use performance related pay. In contrast, firms that have private blockholders or SOEs as their major shareholders relate the CEO's pay to increases in stockholders' wealth or increases in profitability. However the pay–performance sensitivities for CEOs are low and this raises questions about the effectiveness of firms' incentive systems.

In 2003 the federal-state Medicaid program provided prescription drug coverage to more than 50 million people. To determine the price that it will pay for each drug, Medicaid uses the average private sector price. When Medicaid is a large part of the demand for a drug, this creates an incentive for its maker to increase prices for other health care consumers. Using drug utilization and expenditure data for the top 200 drugs in 1997 and in 2002, we investigate the relationship between the Medicaid market share (MMS) and the average price of a prescription. Our estimates imply that a 10-percentage-point increase in the MMS is associated with a 7 to 10 percent increase in the average price of a prescription. In addition, the Medicaid rules increase a firm's incentive to introduce new versions of a drug in order to raise price. We find empirical evidence that firms producing newer drugs with larger sales to Medicaid are more likely to introduce new versions. Taken together, our findings suggest that government procurement rules can alter equilibrium price and product proliferation in the private sector.

We develop a model for the use of stock options in compensation agreements based on a financing explanation. Our model is consistent with the extensive use of options for non-executive employees. Simulation results from our model show an optimal use of options of about 9.3% of total compensation for a non-executive employee with a compensation of US$50,000. Finding an optimal level of options as part of compensation in this context requires a balancing of two opposing factors—the benefit of a lower capital issuance cost versus a higher compensation cost as a result of the discount that an employee places on options because of an undiversified position.

This paper captures banks’ dynamic response to depositor discipline. Recognizing that the price and quantity response of uninsured deposits in the face of deteriorating fundamentals needs to be modeled as an endogenous process, we investigate how depositor discipline constrains banks’ behavior by extracting the impact of an exogenous rise in interest rates on the quantity of uninsured deposits. We find that good banks can raise uninsured deposits by raising their price, while weak banks cannot. This suggests that depositor discipline not only raises the cost of choosing a higher level of risk but also may, at very high levels of risk, effectively constrain bank managers’ behavior.

The existence of counteroffers can lead to a variety of important labor‐market features. This article develops a model of the selective use of counteroffers in which a firm decides whether to extend counteroffers after a worker informs the firm of an alternative offer. We outline factors that can influence the employer’s net value of making a counteroffer and, thus, affect the likelihood of a counteroffer. We provide a new empirical analysis that examines whether proxies for these factors do, in fact, influence the likelihood that a firm would consider a counteroffer to an employee with a competing offer.

This article shows how the market coskewness model of Rubinstein (1973) and Kraus and Litzenberger (1976) is altered when a nonredundant call option is optimally traded. Owing to the option's nonredundancy, the economy's stochastic discount factor (SDF) depends not only on the market return and the square of the market return but also on the option return, the square of the option return, and the product of the market and option returns. This leads to an asset pricing model in which the expected return on any risky asset depends explicitly on the asset's coskewness with option returns. The empirical results show that the option coskewness model outperforms several competing benchmark models. Furthermore, option coskewness captures some of the same risks as the Fama-French factors small minus big (SMB) and high minus low (HML). These results suggest that the factors that drive the pricing of nonredundant options are also important for pricing risky equities.

Smith [Smith, M., 1996. Shareholder activism by institutional investors: evidence from CALPERS. Journal of Finance 51, 227-252] and Wahal [Wahal, S., 1996. Public pension fund activism and firm performance. Journal of Financial and Quantitative Analysis 31, 1-23] identify significant positive abnormal returns surrounding the announcement of performance targetings by the California Public Employees Retirement System (CalPERS), dubbed the “CalPERS effect.” More recent studies suggest that this “CalPERS effect” continues in later samples. While I confirm the early period results, I find the results reported in studies examining later periods are driven by the inclusion of early 1992–1993 targetings and from a significant bias in the market model parameters caused by estimation during periods of known under-performance. Additionally, these results are partially driven by the failure to control for contaminating events and the use unnecessarily long event windows. Contrary to previous studies, after addressing these methodological concerns, I find no evidence to support the continued existence of a “CalPERS effect”.