The paper provides early evidence on the informativeness of commodity price risk measures required by the Securities and Exchange Commission's new market risk disclosure rules (SEC 1997). I use existing disclosures of oil and gas producers (O&G) to obtain proxies for the tabular and sensitivity analysis disclosures required by the new SEC rules. I find that proxies for the tabular and the sensitivity analysis format are significantly associated with O&G firms' stock return sensitivities to oil and gas price movements. This finding casts doubt on claims that the new market risk disclosures do not reflect firms' risk exposures. The proxies for the tabular format and sensitivity format disclosures are not substitutable explanations of firms' risk exposures. This evidence suggests that disclosures from one disclosure format are not comparable to those from the other reporting format.

We examine whether executive stock options (ESOs) provide managers with incentives to invest in risky projects. For a sample of oil and gas producers, we examine whether the coefficient of variation of future cash flows from exploration activity (our proxy for exploration risk) increases with the sensitivity of the value of the CEO's options to stock return volatility (ESO risk incentives). Both ESO risk incentives and exploration risk are treated as endogenous variables by adopting a simultaneous equations approach. We find evidence that ESO risk incentives has a positive relation with future exploration risk taking. Additional tests indicate that ESO risk incentives exhibits a negative relation with oil price hedging in a system of equations where ESO risk incentives and hedging are allowed to be endogenously determined. Overall, our results are consistent with ESOs providing managers with incentives to mitigate risk-related incentive problems.

We examine the influence of rationalization on NYC taxi drivers’ decisions to cheat their customers. We find that cheating ramps up by an order of magnitude when taxi drivers are in settings where it is easier for them to view cheating as acceptable as opposed to dishonest. This finding provides field evidence support for the idea that self-concept maintenance plays an important role in preventing fraud, and that fraud in economic exchange multiplies when participants can rationalize cheating in a way that precludes it from affecting their self-concept.

This study investigates the implementation of a Government of India mandate that requires firms to spend at least 2% of their profits on corporate social responsibility (CSR). The results show that qualifying firms that voluntarily engaged in CSR before the mandate reduce their CSR spending afterward. Despite increasing advertisement expenditure likely to offset the lost signaling value of voluntary CSR, stock prices and operating performance of former voluntary CSR spenders who qualify under the law decline. Our results suggest that regulatory intervention in CSR can both diminish its signaling value and lead to a reduction in voluntary CSR spending.

In 2013, a new law required Indian firms, which satisfy certain profitability, net worth, and size thresholds, to spend at least 2% of their net income on corporate social responsibility (CSR). We exploit this regulatory change to isolate the shareholder value implications of CSR activities. Using an event study approach coupled with a regression discontinuity design, we find that the law, on average, caused a 4.1% drop in the stock price of firms forced to spend money on CSR. However, firms that spend more on advertising are not negatively affected by the mandatory CSR rule. These results suggest that firms voluntarily choose CSR to maximize shareholder value. Therefore, forcing a firm to spend on CSR is likely to be sub‐optimal for the firm with a consequent negative impact on shareholder value.

Articles in the financial press suggest that institutional investors are overly focused on current profitability. This suggests that as institutional ownership increases, stock prices will reflect less current period information that is predictive of future period earnings. On the other hand, institutional investors are often characterized in academic research as sophisticated investors. Sophisticated investors should be better able to utilize current period information to predict future earnings compared to other owners. According to this characterization, as institutional ownership increases, stock prices should reflect more current period information that is predictive of future period earnings. Consistent with this latter view, we find that the extent to which stock prices lead earnings is positively related to the percentage of institutional ownership. This result holds after controlling for various factors that affect the relation between price and earnings. It also holds when we control for endogenous portfolio choices of institutions (e.g., institutional investors may be attracted to firms in richer information environments where stock prices tend to lead earnings). Further, a regression of stock returns on order backlog, conditional on the percentage of institutional ownership, indicates that institutional owners place more weight on order backlog compared to other owners. This is consistent with institutional owners using non-earnings information to predict future earnings. It also explains, in part, why prices lead earnings to a greater extent when there is a higher concentration of institutional owners.

Articles in the financial press suggest that institutional investors are overly focused on current profitability, which suggests that as institutional ownership increases, stock prices reflect less current period information that is predictive of future period earnings. On the other hand, institutional investors are often characterized in academic research as sophisticated investors and sophisticated investors should be better able to use current‐period information to predict future earnings compared with other owners. According to this characterization, as institutional ownership increases, stock prices should reflect more current‐period information that is predictive of future period earnings. Consistent with this latter view, we find that the extent to which stock prices lead earnings is positively related to the percentage of institutional ownership. This result holds after controlling for various factors that affect the relation between price and earnings. It also holds when we control for endogenous portfolio choices of institutions (e.g., institutional investors may be attracted to firms in richer information environments where stock prices tend to lead earnings). Further, a regression of stock returns on order backlog, conditional on the percentage of institutional ownership, indicates that institutional owners place more weight on order backlog compared with other owners. This result is consistent with institutional owners using non‐earnings information to predict future earnings. It also explains, in part, why prices lead earnings to a greater extent when there is a higher concentration of institutional owners.

This research investigates whether oil and gas producing firms use abnormal accruals and hedging with derivatives as substitutes to manage earnings volatility. Firms engaged in oil exploration and drilling are exposed to two kinds of risks that can cause earnings volatility: oil price risk and exploration risk. Firms can use abnormal accrual choices and/or derivatives to reduce earnings volatility caused by oil price risk, but cannot directly hedge the operational risk of unsuccessful drilling. Because hedging and using abnormal accruals are costly activities, and because prior research suggests managers do not eliminate all volatility (Haushalter 2000; Barton 2001), we expect that, at the margin, managers will use these smoothing mechanisms as substitutes to manage earnings volatility. Our results suggest a sequential process whereby managers of oil and gas producing firms first determine the extent to which they will use derivatives to hedge oil price risk, and then, especially in the fourth quarter, manage residual earnings volatility by trading off abnormal accruals and hedging with derivatives to smooth income.

US state governments frequently provide firms with targeted subsidies. In exchange, recipients promise to create or retain a certain number of jobs in the subsidizing state. Using novel hand-collected data, we address three questions: (i) the extent to which firms meet job creation targets promised in their applications, (ii) the factors that determine which firms meet the targets, and (iii) the benefits to firms from meeting those targets. We find that 63% of subsidies awarded to publicly traded U.S. firms between 2004 and 2015 meet their promised job creation targets. Firms with poorer labor practices are less likely to meet their targets, as are politically connected firms that receive subsidies in election years. Conversely, promised job targets are also more likely to be met for subsidies accompanied by government press releases but less likely to be met for subsidies accompanied by firm press releases; the latter likely reflects the fact that firms put out press releases for larger subsidies with more ambitious job targets. In terms of consequences, firms that meet job targets are more successful at obtaining subsequent subsidies both in and out of subsidizing states. However, while firms’ success in meeting job targets is associated with an uptick in positive media coverage, this does not flow through to ESG ratings, even on scores specific to community impact. Our results should be of interest to both academics and policymakers interested in the design of state-level economic incentives.