We investigate whether risk-related incentives of executive stock option (ESO) compensation plans are associated with income smoothing. Given that risk has both potential benefits and costs, including possible losses and/or large fluctuations that affect reported financial outcomes, flexibilities in financial reporting enable a manager to make apparent risk lower while masking the underlying real risk. As such, income smoothing can be a means by which a manager can reduce the unintended consequences of risk taking without at the same time reducing its intended consequences. Using a sample of approximately 7,000 firm-years, we find that risk-taking incentives and income smoothing are positively related. Our results are robust to alternate specifications of income smoothing and risk-taking, and to various firm-level characteristics, including governance structures, CEO share and option holdings. Additionally, we find that our results are especially pronounced in firms whose risk and risk-taking behavior are high.

Mafia firms introduce distortions in the markets in which they operate, increasing the cost of doing business for peer firms. We investigate whether peers respond by increasing their tax avoidance and thus increasing funds available to compete with the Mafia firms. Using a sample of Italian anti‐Mafia police actions that resulted in the removal of Mafia firms and a difference‐in‐differences approach, we find that peers reduce their tax avoidance following these actions. We further show that, following anti‐Mafia police actions, peer firms improve their performance and increase capital investment while enjoying a reduction in the cost of raw materials. Overall, our results highlight the microlevel channels through which Mafia can affect firm outcomes and local economies.