We study a publicly traded firm that cares about its short-term stock market performance while collaborating with a privately owned firm in a business alliance. The firms each undertake a relation-specific investment and then bargain over the allocation of the joint surplus generated by the alliance. The public firm’s myopic market concerns affect both the total size of the surplus and how the firms divide the surplus. While the public firm always becomes more aggressive and obtains more of the surplus, the total size of the surplus may become larger or smaller, due to the effect of myopic market concerns on the firms’ investment incentives. We establish conditions under which the investment and the value of each firm increase or decrease with market concerns. The market concerns could mitigate or exacerbate the hold-up problem between the two firms and thus could either benefit or harm the whole business alliance. We also study two extensions with (i) the two investments being substitutes instead of complements and (ii) both firms being publicly listed. In both cases, the insights from our main model still hold.

In empirically estimating the relation between CEO compensation and accounting‐based firm and peer performance, researchers often define the performance variables net of CEO compensation expense. We analytically show that a researcher's use of CEO compensation as a regression's dependent variable and as an expense in defining a regression's independent variables representing accounting‐based firm and peer performance will bias the researcher's pay‐for‐performance and relative performance evaluation (RPE) regression coefficients. In a panel estimation of CEO compensation, we document an attenuation bias in the coefficients on net firm and net peer performance. This evidence may partially explain inferences of weak CEO incentives and limited usage of RPE in prior work. Our results imply that in CEO compensation regressions, a researcher can remove biases in inferring CEO incentives and RPE usage by using gross rather than net accounting performance variables—that is, by adding back CEO compensation expense to net accounting measures.