In oligopolies, firms behave strategically and commit to actions that elicit favorable responses from rivals. Firm actions consequently are a function of the nature of these strategic interactions. In this paper, we develop a methodology for the empirical estimation of strategic interactions in product markets. We then apply our measure of strategic interactions to CEO compensation. We use quarterly data on profits and sales from Compustat to estimate the slope of firm’s reaction function. When the slope is negative and marginal profits decrease with an increase in the rival’s actions the firm is classified as a strategic substitute. When the slope is positive and marginal profits increase with an increase in the rival’s actions the firm is classified as a strategic complement. As predicted by theory, we find significant evidence that strategic substitutes decrease the pay for performance incentives of their CEOs. On the other hand, strategic complements significantly increase CEO pay for performance incentives. The empirical measure developed can be used to test a wide variety of strategic models.

Recent frauds have questioned the efficacy of the SEC's enforcement program. We hypothesize that differences in firms' information sets about SEC enforcement and constraints facing the SEC affect firms' proclivity to adopt aggressive accounting practices. We find that firms located closer to the SEC and in areas with greater past SEC enforcement activity, both proxies for firms' information about SEC enforcement, are less likely to restate their financial statements. Consistent with the resource-constrained SEC view, the SEC is more likely to investigate firms located closer to its offices. Our results suggest that regulation is most effective when it is local.

Abstract We use a sharp regression discontinuity design (RDD) to show that victories by women candidates in close House, Senate, and gubernatorial elections lead to an increase in female directors in firms located in the candidates’ districts. The causal effect is higher when the media coverage of the woman candidate is higher, when voter turnout is high, and when firms have more local directors and local institutional investors. The heterogeneous regression discontinuity (RD) effects suggest that electoral wins may influence local gender norms and firms’ board diversity through multiple channels, including conveying majority views on gender-related social norms, increasing exposure to exemplar women, and facilitating learning about women’s different but effective leadership styles. The evidence suggests a potential spillover effect from women’s political leadership to the corporate world.

We find that fixed effects related to the location of firms’ headquarters explain variation in broad based option grants after controlling for industry effects and firm characteristics traditionally known to affect option granting. Location matters because of local labor market conditions and social interaction with neighboring firms. Broad based option grants are higher: (i) when a firm's stock prices co-move more with stock prices of other firms located in that Metropolitan Statistical Area (MSA); (ii) in states that are less likely to enforce non-compete agreements; and (iii) in MSAs where employees prefer options because stocks there experience abnormally high returns.

We argue that earnings management and fraudulent accounting have important economic consequences. In a model where the costs of earnings management are endogenous, we show that in equilibrium, low-productivity firms hire and invest too much in order to pool with high productivity firms. This behavior distorts the allocation of economic resources in the economy. We test the predictions of the model using firm-level data. We show that during periods of suspicious accounting, firms hire and invest excessively, while managers exercise options. When the misreporting is detected, firms shed labor and capital and productivity improves. Our firm-level results hold both before and after the market crash of 2000. In the aggregate, our model provides a novel explanation for periods of jobless and investment-less growth.

We study fund-firm connections that arise when firm executives and directors serve as fund directors. We find that connected funds are significantly more likely to vote with management in proposals with negative Institutional Shareholder Services (ISS) recommendations or low shareholder support. As our data show that management support does not exist either before connection formation or after its termination, this result is unlikely to be caused by omitted factors. Rather, the connected fund's voting patterns show independence from ISS recommendations and successful connected voting is associated with positive announcement returns, suggesting that connected fund support for management reflects information advantages. Lastly, we find that a fund family and firm are more likely to connect when the fund family holds a large stake in the firm and is geographically proximate as well as when it has a record of voting independently from ISS.

This paper examines the effect of CEO compensation contracts on misreporting. We find that the sensitivity of the CEO's option portfolio to stock price is significantly positively related to the propensity to misreport. We do not find that the sensitivity of other components of CEO compensation, i.e., equity, restricted stock, long-term incentive payouts, and salary plus bonus have any significant impact on the propensity to misreport. Relative to other components of compensation, stock options are associated with stronger incentives to misreport because convexity in CEO wealth introduced by stock options limits the downside risk on detection of the misreporting.

We examine the impact of geographical proximity on the acquisition decisions of US public firms over the period 1990–2003. Transactions where the acquirer and target firms are located within 100 km of each other are classified as local transactions. We find that acquirer returns in local transactions are more than twice that in non-local transactions. The higher return to local acquirer is not explained by related, either horizontal or vertical, industry transactions, and appears to be related to information advantages arising from geographical proximity. These information advantages facilitate acquisition of targets that, on average, create higher overall return. The higher return to local acquirers is preserved by the use of target termination fee contracts.

Several recent papers document that the magnitude of potential gains from stock-based compensation is positively related to the likelihood of misreporting. In a sample of firms that announce restatements of their financial statements from 1997 to 2002, we examine whether managers realize these potential gains occurring from their accounting choices. After controlling for diversification needs and stock price impact, we find no significant evidence of higher option exercises by executives in the misreported years. However, for firms that are more likely to have made deliberate aggressive accounting choices, we find significant evidence of higher option exercises. For these firms, option exercises are higher by 20–60% in comparison to industry and size matched nonrestating firms. Options exercises by executives are also increasing in the magnitude of the restatement as captured by the effect of the restatement on net income. These higher option exercises tend to be more pervasive and are not just confined to the CEO and CFO of the firm.

We find that firms grant more rank and file stock options when involved in financial reporting violations, consistent with managements’ incentives to discourage employee whistle-blowing. Violating firms grant more rank and file options during periods of misreporting relative to control firms and to their own option grants in non-violation years. Moreover, misreporting firms that grant more rank and file options during violation years are more likely to avoid whistle-blowing allegations. Although the Dodd-Frank Act (2010) offers financial rewards to encourage whistle-blowing, our findings suggest that firms discourage whistle-blowing by giving employees incentives to remain quiet about financial irregularities.