We study how corporate taxation interacts with intrafirm incentive conflicts between shareholders and managers and how this interaction impacts the firm's economic decisions and outcomes. In our model, investment under asymmetric information facilitates entrenchment and rent extraction by the privately informed manager. We show that when the future investment payoff is exogenous, a corporate tax cut increases managerial rents, reduces pre‐tax investment profitability, increases the firm's optimal investment hurdle rate, and reduces investment. When the manager can exert upfront project development effort to increase the expected investment payoff, a tax rate reduction not only encourages more effort but also leads the firm to increase the investment hurdle rate to curtail rents. In equilibrium, a lower tax rate always benefits the manager, but the sensitivity of the project's return to the manager's effort determines whether the firm will increase or decrease investment in response to a tax cut, and whether the firm's resulting pre‐tax profit will increase or decrease. Overall, our study shows that intrafirm incentive conflicts can be an important factor in the interplay between tax incidence and economic efficiency, two central themes in corporate tax policy debates.

We investigate a transfer pricing problem between two divisions within a decentralized firm. An upstream division produces an intermediate good that is used by another division within the firm and is also sold in an external market, where the firm competes with a rival selling a differentiated substitute product. Assuming that headquarters has imperfect information about the upstream division's private information and that communication is restricted, we identify conditions under which the firm will prefer a market‐based transfer price based on the market price set by the firm's rival rather than on the market price set by the upstream division. The two transfer prices affect the price‐setting incentives of the upstream division and its rival differently, and convey different levels of private‐cost information to the downstream division, which impacts internal trade efficiency. The relative performance of the two transfer pricing regimes depends on the relative size of internal versus external demand for the upstream division's good and on the degree of uncertainty about the upstream division's costs. Overall, our analysis provides new insights about how alternative market‐based transfer prices can coordinate decentralized decision‐making in the absence of a perfectly competitive intermediate market.

We model relative performance evaluation ( RPE ) when a Chief Executive Officer ( CEO ) has the power to opportunistically influence the design of RPE by choosing the weight on an index‐based peer group or by customizing the selection of peers comprising a peer group. A powerful CEO compares the benefits of reducing common risk affecting his compensation with the benefits of receiving a higher bonus by economizing on expected peer‐group performance. As a consequence, the Board of Directors (BoD) is less likely to use RPE . Our analytical model yields hypotheses predicting that powerful CEO s choose to reduce common risk only partially and that BoDs choose to not implement RPE if expected peer performance is sufficiently high. Our model has further empirical implications in (i) providing new interpretations of tests for detecting strong‐form and weak‐form RPE in the presence of powerful CEO s, and (ii) suggesting a new empirical measure of CEO power with a focus on the delegation of RPE decision rights.

This paper extends a familiar model of competition and disclosure to incorporate the practical feature that firms may not only hold private information about consumer demand, but they can also influence demand by the investments they make in improving product quality. Such investments can reflect installing new product features, improving durability, adding design enhancements, and the like. This paper demonstrates that investments stand to significantly influence the firm's preference for disclosures and, in fact, become a determining feature of disclosure choice. In particular, under Cournot competition, a firm prefers disclosure when the industry‐wide effects of information and investments are concordant. That is, if both product quality and demand information have large positive industry spillovers, disclosure is desirable because it promotes implicit cooperation in investments; if both have low spillover, disclosure permits a firm to convey strength to a rival and then use quantity and quality in concert to dominate the market precisely when the firm's demand is at its peak.

In empirically estimating the relation between CEO compensation and accounting‐based firm and peer performance, researchers often define the performance variables net of CEO compensation expense. We analytically show that a researcher's use of CEO compensation as a regression's dependent variable and as an expense in defining a regression's independent variables representing accounting‐based firm and peer performance will bias the researcher's pay‐for‐performance and relative performance evaluation (RPE) regression coefficients. In a panel estimation of CEO compensation, we document an attenuation bias in the coefficients on net firm and net peer performance. This evidence may partially explain inferences of weak CEO incentives and limited usage of RPE in prior work. Our results imply that in CEO compensation regressions, a researcher can remove biases in inferring CEO incentives and RPE usage by using gross rather than net accounting performance variables—that is, by adding back CEO compensation expense to net accounting measures.