Local political corruption can distort resource allocation decisions either by increasing the risk of wealth expropriation or through local contagious norms, thereby acting as a force that restrains downward adjustments when demand decreases more than upward adjustments when demand increases. Consistent with this idea, we document that firms headquartered in more corrupt U.S. states exhibit stronger asymmetric cost responses to activity changes. Evidence from two quasi-natural experiments supports a causal interpretation of this link. The impact of corruption on cost asymmetry intensifies when there is a higher likelihood of political interference, firms sacrifice financial and operating flexibility to deter expropriation, and private corruption exists alongside public corruption. Conversely, it weakens for firms with high standards of cultural integrity and stringent monitoring. Finally, we show that corruption-induced cost asymmetry has adverse valuation implications and that our main findings, while identified in the U.S. setting, also find suggestive support in an international context. Overall, our study suggests that political corruption represents an asymmetric friction in resource allocation decisions, leading to a potentially excessive degree of asymmetric cost behavior.

Greater partisan alignment among lawmakers enhances their ability to respond rapidly to adverse shocks, but it also undermines the quality of checks and balances and encourages excessive governmental intervention in local areas aligned with the ruling party. We investigate how this form of local policy risk affects IPO underpricing. One standard-deviation increase in political alignment between local politicians and the federal government translates into an extra $1.58 million being left on the table, which corresponds to 5.39% of the average valuation discount. This effect is concentrated in firms that are vulnerable to legislative interventions and has important long-term implications. Our robustness analysis also shows that our baseline results are not sensitive to the inclusion/exclusion of influential states and years with high IPO activity.

This study tests the proposition that higher tournament incentives play a major role in lowering the failure risk of Initial Public Offerings (IPOs). Measuring tournament incentives as the pay gap between the CEO and its subordinate executives, we find that an interquartile change in the distribution of the CEO pay gap translates into a decline in failure risk probability by approximately 27%. The results are driven by the long-term rather than the short-term component of exective pay. Our results hold in an instrumental-variable setting that exploits exogenous variation in the likelihood of employing intra-firm, tournament-based, promotion incentives. Cross-sectional tests indicate that the negative link between tournament incentives and IPO failure is more pronounced when internal promotion contests are more likely to occur. Finally, we document that CEO pay gap is associated with superior long-run operating performance and greater investment efficiency.

We find that Chief Financial Officers (CFOs) with greater career concerns are more diligent and conservative in preparing financial statements during an Initial Public Offering (IPO). Additional tests exploiting exogenous variation in managerial career concerns suggest that our documented relations are not sensitive to unobservable omitted factors. Furthermore, we document that CFOs who are relatively more concerned about their future job prospects are more sensitive when there is greater scrutiny or higher litigation risk and are less likely to succumb to undue pressures from influential shareholders to exaggerate the firm's prospects. Finally, we show that CFOs with longer decision horizons prefer more transparency during the IPO process, which in turn, translates to superior post-IPO performance and better labor market outcomes than their counterparts. Overall, our findings indicate that career concerns play a disciplining role during IPOs and that CFOs exploit these high-visibility events to accelerate their career trajectory.