In this study we analyze how CEO risk incentives affect the efficiency of research and development (R&D) investments. We examine a sample of 843 cases in which firms increase their R&D investments by an economically significant amount over the period of 1995–2006. We find that firms with higher sensitivity of CEO compensation portfolio value to stock volatility (vega) are more likely to have large increases in R&D investments. More importantly, we find that high-vega firms experience lower abnormal stock returns and lower operating performance compared to their low-vega counterparts following the R&D increases. Our main results hold in a variety of robustness tests. The results are consistent with the conjecture that high-vega compensation portfolios may induce managers to overinvest in inefficient R&D projects and therefore hurt firm performance.

Black and Hispanic homeowners pay significantly higher mortgage interest rates than white and Asian homeowners. We show that the main reason is that white and Asian borrowers are much more likely to exploit periods of falling interest rates by refinancing their mortgages or moving. Black and Hispanic borrowers face challenges refinancing because, on average, they have lower credit scores, equity and income. But even holding those factors constant, Black and Hispanic borrowers refinance less, suggesting that other factors are at play. Because they are more likely to exploit lower interest rates, white borrowers benefit more from monetary expansions. Policies that reduce barriers to refinancing for minority borrowers and alternative mortgage contract designs can reduce racial mortgage pricing inequality.

Not all corporate bailouts are the same. We study corporate bailouts from around the world during 1987–2005. Among these bailed-out firms, some firms are economically distressed while others are financially distressed. Some firms are bailed out with cash (either as equity or as loans) while others are bailed out with debt relief. Some firms are bailed out by the government while others are bailed out by other stakeholders. We examine these firms’ operating performance before and after their bailouts, but specifically across different bailout types, and we also measure their stock returns surrounding their bailout announcements.

This paper extends prior work on the links between political patronage and capital structure in developing economies. Three proxies of political patronage are developed and applied to a group of Malaysian firms over a 10-year period. We find a positive and significant link between leverage and each of the three measures of political patronage. We also find evidence of an indirect link between political patronage and capital structure through firm size and profitability.

This study identifies a new economic benefit of common institutional ownership, which refers to the increasingly contentious phenomenon of U.S. firms sharing stockholders with their industry competitors. We find a significantly negative relation between common ownership and insider trading profitability. The disciplinary effect of common ownership on opportunistic insider trading is particularly evident when the information effects of common ownership are greater, when common owners are more likely to benefit from positive governance externalities, and in the subset of trades made by opportunistic insiders. Using the exogenous variations in common ownership induced by financial institution mergers, we conduct a difference-in-differences analysis and find consistent results. We also provide evidence that common owners encourage firms to impose ex-ante restrictions on insider trading and take ex-post actions to discipline opportunistic insiders by voting against management. Overall, our findings suggest that common institutional shareholders have information advantages, governance incentives, and effective means to constrain opportunistic insider trading.

This study examines whether and how linguistic information quality (measured by readability) of customer firms' management earnings forecast reports (MEFRs) affects supplier firms' investment quality (measured by investment efficiency). Our analyses reveal that supplier investment efficiency is positively associated with the average linguistic information quality of customers' prior MEFRs, and the positive association between supplier investment efficiency and customer MEFRs' numerical information quality is stronger in supplier firms with more readable customer MEFRs. Our analyses also reveal that higher linguistic information quality of customer MEFRs improves the monitoring of supplier firms by their outside stakeholders, such as institutional investors and financial analysts, and ameliorates the negative impact of suppliers' customer‐dependence on their investment efficiency. Our results suggest that greater linguistic information quality of a customer firm's forward‐looking disclosures is associated with higher‐quality investments made by its suppliers along the supply chain.

We find that social capital, as captured by associational networks and social norms in US counties where corporate headquarters are located, is positively associated with cash dividend payouts in local firms. The positive effect is incremental to other known local factors affecting dividends, is robust to a range of sensitivity analyses, and extends to corporate decisions about whether to pay dividends or not. Social capital mitigates managerial private financial incentives to limit dividends and encourages higher dividends among firms facing greater free cash flow problems. Social capital also attenuates over-investment of free cash flow.

We find that social capital in U.S. counties, as captured by strength of social norms and density of social networks, is positively associated with innovation of firms headquartered in the county, as captured by patents and citations. This relation is robust in fixed-effect regressions, instrumental variable regressions with a Bartik instrument, propensity score matching regressions, and a difference-in-differences design that isolates the effects of over time variations in social capital due to corporate headquarter relocations. Strength of social norms plays a more dominant role than density of social networks in producing these empirical regularities. Cross-sectional evidence indicates the prominence of the contracting channel through which social capital relates to innovation. Additionally, we find that social capital is also positively associated with trademarks and effectiveness of corporate R&D expenditures.

This study examines the value of language, as an important dimension of culture, to banks. Based on a unique hand-collected dataset of Chinese commercial banks and a county-level dialect dataset, we find that a higher degree of dialect similarity between the chairman and the CEO is associated with a higher return on assets, a higher return on equity, and a lower cost-to-income ratio, suggesting that dialect similarity plays a positive role in improving bank performance. Further analyses show that dialect similarity has no significant association with bank risk and bank expansion. In addition, it does not cause higher CEO pay or lower pay-performance sensitivity. These results indicate that dialect similarity does not lower the monitoring effectiveness. We also investigate the relation between dialect similarity and banks’ agency costs and the results show that dialect similarity reduces agency costs significantly. Our findings are robust to alternative measures of dialect similarity, the separation of the “dialect level effect”, and the potential endogeneity of dialect similarity.

We find that social capital, as captured by secular norms and social networks surrounding corporate headquarters, is negatively associated with levels of CEO compensation. This relation holds in a range of robustness tests including those that address omitted variable bias and reverse causality. Additionally, social capital reduces the likelihood that firms make opportunistic option grant awards that unduly favor CEOs, including lucky awards, backdated awards, and unscheduled awards. Social capital also lessens the accretive effect of CEO power on CEO compensation. These findings indicate that social capital mitigates agency problems by restraining managerial rent extraction in CEO compensation.