We examine whether financial performance metrics in CEO compensation contracts provide incentives for environmental performance improvement, and the conditions under which such incentives arise. Using toxic pollution as our primary outcome, we find that relative financial performance evaluation (RPE) is negatively associated with future pollution in firms whose environmental impacts are subject to greater scrutiny, whereas other financial incentives, such as equity portfolio delta and new equity grants, show no such association. This pattern is consistent with theories of corporate social responsibility and, as supported by complementary tests, with the idea that stronger environmental performance can improve a firm’s relative financial position by attracting customers, employees, and shareholders from less responsible peers. We further show that the RPE-pollution relation varies predictably with various RPE plan characteristics and stakeholder switching costs, persists when we instrument for the use of RPE, and operates in part through increased environmental innovation.

We examine the role of firms’ internal information quality (IIQ) in designing executive incentive contracts. We find that higher IIQ is associated with a greater number of performance metrics and increased dissimilarity from peer firms’ contracts, particularly along non-financial dimensions. These relations hold when we examine changes in IIQ that are likely induced by plausibly exogenous shifts in two financial accounting standards. We further find that incorporating more numerous and more dissimilar non-financial metrics is positively associated with future profitability, but only when IIQ is high. Our results are consistent with the hypothesis that the quality of a firm’s internal information is a friction in performance metric selection.

We study how the assignment of intellectual property rights between inventors and their employers affects innovation. Incomplete contracting theories predict that stronger employer property rights reduce the threat that employee inventors hold up their employers, thereby affecting inventor and invention outcomes. We test these predictions using a U.S. appellate court ruling that shifted the assignment of property rights from inventors to their employers. Within‐employer‐year analyses demonstrate that affected inventors are less likely to retain patent rights, assign patents to new employers, or leave their current employer, all consistent with reduced inventor ability to hold up their employers. Due to the reduced possibility of hold‐up, affected inventors’ innovations are revealed more promptly when disclosed, draw from a broader set of prior patents, and spread more to subsequent patents. If affected inventors do leave their employer, they are more likely to relocate to unaffected states. Furthermore, employers affected by the ruling are more likely to locate their inventors in agglomeration economies and alter their innovation strategy by reallocating activity across states and expanding their innovation portfolios. Our collective evidence suggests that shifting intellectual property rights to employers affects inventor and invention outcomes by reducing the threat of employee hold‐up from the employer's perspective.