This article explores the relationship between a firm’s legal contracting environment and its innovation incentives. Using granular data from the pharmaceutical industry, we examine a contracting mechanism through which incumbents maintain market power: “pay-for-delay” agreements to delay the market entry of competitors. Exploiting a shock where such contracts become legally tenuous, we find that affected incumbents subsequently increase their innovation activity across a variety of project-level measures. Exploring the nature of this innovation, we also find that it is more “impactful” from a scientific and commercial standpoint. The results provide novel evidence that restricting the contracting space can boost innovation at the firm level. However, at the extensive margin we find a reduction in innovation by new entrants in response to increased competition, suggesting a nuanced effect on aggregate innovation.

This paper examines investors’ perceptions of auditor involvement in non‐GAAP reporting as captured by non‐GAAP disclosures in 10‐K filings. We find that firm‐years with auditor involvement in non‐GAAP reporting have higher CARs, lower bid–ask spreads, lower stock volatility, and lower abnormal trading volume on 10‐K filing dates. To sharpen identification of auditor involvement, we hand‐collect non‐GAAP measures and reconciliations for S&P 500 firms and identify which exclusions reconcile directly to the audited financial statements. As the percentage of exclusions that reconcile directly to the audited financial statements increases, bid–ask spreads and stock volatility on 10‐K filing dates decrease. We find that the results are not driven by strategic reporting or managers’ responses to perceived litigation risk. This study provides new insights into non‐GAAP disclosures outside of earnings announcements, which have been largely ignored in prior literature. Collectively, our results suggest investors value auditor involvement in non‐GAAP reporting and inform policymakers and standard setters considering the usefulness of assurance over non‐GAAP measures.

We use variation in state corporate income tax rates to re-examine the relation between taxes and corporate leverage. Contrary to prior research, corporate leverage rises after tax cuts for small private firms. An estimated dynamic equilibrium model shows that tax cuts make capital more productive and spur the use of leverage. Tax cuts also produce more distant default thresholds and lower credit spreads. These effects outweigh the lower interest tax deduction and lead to higher optimal leverage choices, especially for firms with flexible investment policies. The presence of the interest tax deduction raises consumer welfare in equilibrium.

In 2001 a large and sustained supply shock halted a heroin epidemic in Australia. We use drug offenses to identify individual opioid users and examine how the shock affected their mortality risks and criminal activity over the next eight years. Initially, gains from fewer overdoses are offset by drug substitution and more crime, including homicides. Most adverse effects dissipate over time, whereas persistent mortality reductions save the lives of around one in 48 individuals in our sample. Our results demonstrate that reducing the supply of illicit opioids can lead to meaningful longer-term improvements, even when the short-term effects are ambiguous.

Using a proprietary data set covering all foreign investors’ daily trades in the Chinese stock market from 2016 to 2019, we find that foreign order flows, facilitated by regulatory liberalization through several channels, present strong predictive power for future stock returns, implying that these order flows are likely informed. We track the source of this informativeness and find that foreign order flows significantly predict firm-level news and news-day returns, suggesting that foreign investors can effectively process local firm information. Finally, we find that regulatory reforms that generally relax investment access requirements further improve foreign investors’ predictive power.