Does government debt impede firm innovation? We address this question by examining the effects of the debt accumulated by local government financing vehicles (LGFVs) across Chinese prefectures between 2006 and 2012 on industrial firms’ R&D spending and patents. We find that government debt reduces firms’ R&D expenditures and lowers firms’ number of new patents. One plausible explanation is that government debt raises firms’ capital costs, which limits innovation activities. Consistently, we find that the innovations of firms that are more likely to be financially constrained – small firms and firms with low cash flow – are more affected by the expansion of government debt. Our results imply that although government deficit spending may stimulate the economy in the short run, it could have negative repercussions for economic productivity in the longer run.

ABSTRACT This study examines the impact of political corruption on the provision of CEO risk-taking incentives. We hypothesize that firms adjust their CEO’s risk-taking incentives to reflect the influence of local political corruption on the firms’ desired level of risk-taking. Using U.S. Department of Justice data on local political corruption, we find that the sensitivity of CEO wealth to stock volatility (vega) is lower in firms located in high-corruption districts. The negative impact of corruption on vega is more pronounced among (1) firms operating in industries that are more dependent on government procurement, (2) firms operating in more innovative industries, and (3) firms without political connections. Our study offers new insights into how the institutional environment shapes executive compensation design. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G32; G38; J33; J41; M52.

ABSTRACT While prior studies generally support that equity-based compensation induces CEOs to manipulate financial reporting, there is limited direct empirical evidence on whether financial misreporting concerns affect compensation design. A key challenge for establishing a causal relationship is that misreporting incentives and compensation policies are often endogenously determined. Exploiting the exogenous reduction in litigation threat following a 1999 ruling of the U.S. Ninth Circuit Court of Appeals, we examine how heightened misreporting concerns in a less litigious environment affect CEOs' compensation design. Consistent with the theoretical prediction that misreporting concerns prevent companies from providing more powerful incentive pay that is otherwise optimal, we find that firms headquartered in Ninth Circuit states decreased CEOs' equity portfolio vega relative to the control firms after the ruling. We further document that this reduction was concentrated among firms facing greater misreporting concerns post-ruling. JEL Classifications: J33; K22; M52.

Abstract We use matched employer-employee data to study the role of the firm in the transmission of income growth into consumption growth. We find that growth in income relative to the firm average (the within-firm component) translates significantly less into consumption than growth in firm average income (the between-firm component). These findings are explained by the lower persistence of the within-firm component of income, better self-insurance for workers more exposed to variations in income growth from the within-firm component, and peer effects in the workplace. Quantitatively, income persistence provides 43% of the explanatory power, self-insurance provides 35%, and peer effects provide 22%.

This paper examines the impact of financial reporting practices on corruption obstacles for about 150,000 firms across 143 mostly developing countries from 2006 to 2019. We document a strong positive relationship between the production of audited financial statements (AFS) and corruption obstacles (CO) faced by the firm. We argue that in a corrupt business environment, rent-seeking bureaucrats use the credible financial information to optimize their bribe demands. Our baseline results remain robust after addressing endogeneity concerns. We further show that country-level institutional quality has a moderating effect on the AFS-CO relation. The evidence from surveying entrepreneurs also provides qualitative support for our empirical findings. Our study sheds light on a previously under-explored adverse consequence of transparency - exposure to corrupt bureaucrats where institutions are weak.

Abstract There is causal evidence that mortgage credit expansions increase house prices. Does an expansion of margin lending increase stock prices? Because unconstrained arbitrageurs are more important for pricing stocks than homes, the impact is not obvious. Tests are limited because sizable shocks to margin lending are rare. We examine a major Chinese margin-lending expansion between 2010 and 2015. Institutional holding, regression discontinuity, and event study evidence—exploiting the rollout of margin lending across stocks—shows that arbitrageurs anticipated and bought in advance of a significant causal effect of credit. We develop a model to rationalize our findings. Our estimates suggest that margin debt contributes to stock market fluctuations.