We analyze the resource allocation decision of a manager inside a multidivision firm whose compensation is based on the firm's stock price. We find that internal investments exhibit a positive correlation across the firms divisions. Namely, when two single-division firms merge the optimal investment level in one division becomes more positively related to the investment level in the other division. In addition, following a spinoff, divisional investments decline (increase) whenever the separated division has a project with a low (high) Sharpe ratio. Finally, multidivision firms trade at a discount which is larger the more diverse the investment sets of the divisions.

This paper develops an agency model in which stock-based compensation is a double-edged sword, inducing managers to exert productive effort but also to divert valuable firm resources to misrepresent performance. We examine how the potential for manipulation affects the equilibrium level of pay-for-performance sensitivity and derive several new cross-sectional implications that are consistent with recent empirical studies. In addition, we analyze the impact of recent regulatory changes contained in the Sarbanes-Oxley Act of 2002 and show how policies intended to increase firm value by reducing misrepresentation can actually reduce firm value or increase the upward bias in manipulated disclosures.

This article explores whether political connections are important in the United States. The article uses an original hand-collected data set on the political connections of board members of S&P 500 companies to sort companies into those connected to the Republican Party and those connected to the Democratic Party. The analysis shows a positive abnormal stock return following the announcement of the nomination of a politically connected individual to the board. This article also analyzes the stock-price response to the Republican win of the 2000 presidential election and finds that companies connected to the Republican Party increase in value, and companies connected to the Democratic Party decrease in value.

This paper investigates how the presence of a large institutional shareholder affects the complexity of corporate investments. Our analysis is based on the observation that the blockholder’s planning horizon does not necessarily coincide with the time it takes for the market to correctly evaluate these investments. It demonstrates that this horizon mismatch creates an incentive for the large shareholder to manipulate the firm’s stock price. In equilibrium, corporate managers respond to these manipulation attempts by increasing the complexity of their investments. This in turn lowers the large shareholder’s incentive to collect costly information, which reduces price informativeness and exacerbates managerial myopia. Thus, our analysis identifies a new cost of block ownership resulting from an increased complexity of corporate investments.

This paper examines how information becomes reflected in prices when investment decisions are delegated to fund managers whose tenure may be shorter than the time it takes for their private information to become public. We consider a sequence of managers, where each subsequent manager inherits the portfolio of their predecessor. We show that the inherited portfolio distorts the subsequent manager's incentive to trade on long‐term information. This allows erroneous past information to persist, causing mispricing similar to a bubble. We investigate the magnitude of the mispricing. In addition, we examine endogenous information quality. In some cases, information quality increases when the manager's expected tenure decreases.

We examine whether the stock market considers corporate lobbying to be value enhancing, using an event that potentially limited the ability of firms to lobby but was exogenous to their characteristics and prior lobbying decisions. The results show that this exogenous shock negatively affects the value of firms that lobby. In particular, we estimate that a firm that spends $100,000 more on lobbying in the 3 years before the shock (where sample average lobbying expenses are about $4 million), experiences a loss of about $1.2 million in shareholder value on average. We also examine the channels through which lobbying may create value for firms.

We present a model of media coverage of corporate announcements. Firms strategically use the media to communicate corporate announcements to a group of traders who observe announcements not directly but through media reports. Journalists strategically select which announcements to report to readers. Media coverage inadvertently incentivizes firms to manipulate the underlying announcements. In equilibrium, media coverage is tilted towards less manipulated negative news. The presence of financial journalists leads to more manipulation but makes stock prices more informative on average. We provide additional predictions regarding the media’s impact on the quality of firm announcements and stock prices.