I develop a model of mergers in which M&A deals are used to reallocate investment opportunities. In equilibrium, acquirers lack internal growth options and seek out projects from targets in the M&A market. The model is able to reconcile many features of the merger data that I document, including the high productivity, investment, and valuation of target firms. Furthermore, in my model, profitability is highly predictive of acquisition, and merger transactions naturally lead to a substantial drop in profitability despite creating value for the acquirer.

We develop a model to characterize and quantify the effects of stock, option, and fixed compensation on a manager’s risk-taking incentive and investment choice. We find the average chief executive officer’s (CEO) compensation contract incentivizes overinvestment by 1.3 percentage points per year, with significant variation across firms and over time. We estimate a value of CEO effort implied by compensation contracts and find it to be strongly related to firm intangibility. Finally, we assess the effects on investment of FAS 123R and a hypothetical ban on option grants and find heterogeneous responses that depend on firm volatility and the prior structure of compensation.

The Tax Cuts and Jobs Act unlocked as much as $1.7 trillion of U.S. multinationals’ foreign cash. We examine the real and financial response to this liquidity shock and find that firms did not increase capital expenditures, employment, R&D, or M&A, regardless of financial constraints. On the financial side, firms paid out only about one-third of the new liquidity to shareholders and retained half as cash. This high retention was not associated with poor governance. The high propensity to retain the liquidity shock as cash, even among well-governed firms with limited financial constraints, is difficult to reconcile with existing theory.

We estimate a dynamic model, featuring agency conflicts and a stochastic tax reform arrival, to evaluate how the change from a worldwide to territorial tax system, enacted under the Tax Cuts and Jobs Act (TCJA), affects foreign investment. Although a worldwide system imposes a higher tax liability on foreign income, we show it encourages excess foreign investment by depressing the opportunity cost of capital. In our estimated model, the TCJA reduces foreign investment by 15.6% on average, with larger declines for services firms and firms with lesser agency conflicts. The reform probability, which we estimate in the model, significantly affects firms’ investment and cash holdings.

Corporate inversion, the process of redomiciling for tax purposes, reduces corporate income taxes, but it imposes a personal tax cost that is shareholder-specific. We develop a model, incorporating the corporate tax benefits and personal tax costs, to quantify the return to inversion for different shareholders. Foreign and tax-exempt investors, along with the chief executive officer, disproportionately benefit. We show that an inversion simultaneously reduces the wealth of many taxable shareholders. The model illustrates an agency conflict in which heterogeneity in personal taxes generates a wealth transfer between shareholders. Furthermore, personal taxes offset the loss in government revenue by 39%.