We investigate whether the Tax Cuts and Jobs Act (TCJA) impacts labor investment efficiency. By lowering the top corporate tax rate from 35% to 21%, ceteris paribus, the TCJA provides firms with a cash windfall. Based on difference-in-differences analysis using non-US based firms as a control group, we find that in the post-TCJA years, labor investment inefficiency increased for US based, but not for non-US based, firms. Further, the increase in labor investment inefficiency is concentrated among US firms with high cash holdings, suggesting that these firms face higher agency costs in the post-TCJA period. Additional analysis suggests that in the post-TCJA period, managers of high cash holding firms were seeking a quiet life. We find weak evidence that strong corporate governance mitigated this negative behavior. Overall, our findings show that tax reform can impact labor investment efficiency and should be of interest to investors, boards of directors, tax authorities, and to researchers.

The theoretical and empirical literature suggests that CEO might not make risky long-term investments if the CEO believes that the benefit of such investments would not materialize or is not recognized by the market until after the CEO has retired. This paper tests the predictions of the Acharya, Myers, and Rajan (2011) internal governance model to counteract the CEO’s tendency to forego such investments on a sample of voluntary CEO turnovers. We find that the optimal level of sharing of tasks between the CEO and her top-management team, the firm’s internal governance, is dependent on the CEO’s career horizon. Additionally, we find the effect of internal governance only matters for older CEOs. We also find that the closer the internal governance is to the optimal level, the smaller is the underinvestment for an older outgoing CEO. We find that the new incoming CEO divests profitably the assets acquired under good internal governance. Finally, we find that optimal internal governance is found to have positive effects on corporate innovation. Our results are robust to continuous matching by generalized propensity score and controlling for the CEO’s explicit pay-performance sensitivity, succession plan, and pay duration.

We study the effects of transparency disclosures on U.S. banks’ relayed culture. Using bank stress-test regulations and a regression-discontinuity design, we exploit the quasi-experimental properties around bank-size policy thresholds. We find that stress-tested banks improve their communicated risk-taking culture and overall corporate culture by improving the sentiment around drivers of risk-taking culture, such as leadership. Stress testing, however, has the unintended consequence of negatively affecting sentiment regarding teamwork and innovation. We find that only banks with strong risk-taking-culture sentiments further reduce their risk-weighted assets and risky loans while increasing profitability, highlighting the distinctive role of the risk subculture in banking.

We investigate intra-industry information transfer to news of a significant corporate event, forced CEO turnover. Intra-industry information transfer occurs when announcements made by one or more firms in an industry contemporaneously affect stock prices of peer firms. We find results strongly consistent with information transfer in response to forced CEO turnover, as evidenced by significant cumulative abnormal returns for industry peer firms around the time of a turnover announcement. We further document that information transfer is stronger to turnovers that signal a firm-CEO mismatch prompted by changing industry conditions (Eisfeldt and Kuhnen 2013). Considering two moderating factors, we find weaker (stronger) information transfer when the CEO was replaced with an outsider (the announcing firm is an industry leader), providing additional evidence that forced CEO turnover at one firm can be indicative of industry-wide changes. Our study has important implications to financial analysts, investors, and boards of directors in assessing changing industry conditions in light of a forced CEO turnover at a peer firm.

We examine the effect of board members with venture capital experience (VC directors) on executive incentives at non-venture-backed public firms. VC directors serving on the compensation committee are associated with greater CEO risk-taking incentives (vega) and pay-for-performance sensitivity (delta). These effects are more substantial if VC directors are from highly reputable VC firms. Using the change of direct flight availability to VC hub cities caused by major airline mergers and annual estimates of VC dry powder per industry as instruments, we show that these results are causal. In addition, VC directors are more focused on growth performance goals in CEO compensation contracts. We also document that prior finding of greater research intensity and innovation when VC directors serve on boards of public firms is partly explained by stronger CEO incentives instilled by such directors. Lastly, we find that having VC directors on nominating and/or governance committees is associated with a higher likelihood of forced CEO turnover.