We investigate how risk-related agency conflicts affect valuable risky investments. Using an exogenous negative shock to shareholders' litigation rights from an unanticipated court ruling that exacerbates risk-related agency conflicts by shielding managers from shareholders' governance through litigation, we show that innovation inputs and quality decline significantly for treated firms. Small firms lacking counteracting governance mechanisms, such as institutional investors, suffer significantly, while large firms with high institutional investments emerge unscathed. Our results are consistent with theories that predict managerial incentives for ‘playing safe’ lead to value-destroying and risk-reducing actions, especially when counteracting incentive mechanisms are muted.

We investigate the impact of product market competition (PMC) on workplace health and safety violations. Our findings reveal that firms facing intense PMC have higher incidences of workplace safety standards violations and pay higher penalties for such offenses. By leveraging reductions in import tariffs as quasi-exogenous shocks, we demonstrate that competitive pressures significantly worsen these violations. The strategic orientations of firms, whether towards cost-cutting or product differentiation, markedly shape these outcomes. Furthermore, pressure from analysts amplifies the negative impact, while labor unionization helps mitigate these detrimental effects, highlighting the nuanced interplay between governance and market forces.

We hypothesize and show that the impact of a regulatory shock depends both on the shock itself and on how firms respond, which can itself depend on the firm's governance attributes. To explore this, we use the staggered passage of Universal Demand (UD) laws, which insulate managers from derivative lawsuits. We find that, on average, firms respond to UD laws by increasing risk-taking incentives (vega), thereby compensating for weaker external discipline, and incentivizing valuable risky investments. Corporate governance, institutional ownership, and CEO power influences the likelihood of adjusting compensation. The firms that do boost vega subsequently experience greater innovation, and a stronger market response to new product announcements. Our results help to reconcile extant findings on the effects of UD laws by showing that the beneficial impact of the laws is conditional on firms’ strengthening their CEOs’ risk-taking incentives, a choice affected by their latent governance arrangements.

We investigate whether external industry tournament incentives influence the design of executive-compensation contracts. Using staggered negative mobility shocks as exogenous disruptions to tournament incentives, we show that firms treated by these shocks act to restore their executives’ diminished implicit risk-taking incentives by increasing compensation vega. On average, post-shock compensation vegas increase by approximately 10%. These effects are considerably larger for treated executives with strong tournament incentives and high ex ante mobility. Mobility shocks have no impact on compensation delta or total pay. Our results shed light on how explicit risk-taking incentives are optimized with respect to executive career concerns.