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We show empirically that disruptive innovations significantly reduce rival firm growth and value in concentrated industries, consistent with the creative destruction hypothesis. Because these innovations make existing technologies obsolete, corporate investments and the amount of external financing to fund these investments also decrease. Disruptive innovations curb market power, thereby CEO compensation and CEO power also decline in affected firms. Overall, we show that disruptive innovation is a fierce force that intensifies competition, disciplines managers of rival firms, and strengthens business dynamism in the USA.

We evaluate competing hypotheses on profit skimming, asymmetric benchmarking, and the effects of implicit incentives using natural disasters as shocks to firm-specific performance. We find that compensation of both CEOs and other top executives are adjusted for exogenous changes in firm-specific performance. Moreover, the change in pay-for-performance sensitivity is greater for favorably rather than adversely affected firms. These results are stronger in firms with independent boards, new outside CEOs, and younger CEOs, where optimal contracting is more likely. Overall, our results support Feriozzi’s (2011) hypothesis that asymmetric pay-for-performance sensitivity can result from implicit incentives, which trigger after negative shocks.

Evaluating agency theory and optimal contracting theory views of corporate philanthropy, we find that as corporate giving increases, shareholders reduce their valuation of firm cash holdings. Dividend increases following the 2003 Tax Reform Act are associated with reduced corporate giving. Using a natural experiment, we find that corporate giving is positively (negatively) associated with CEO charity preferences (CEO shareholdings and corporate governance quality). Evidence from CEO-affiliated charity donations, market reactions to insider-affiliated donations, its relation to CEO compensation, and firm contributions to director-affiliated charities indicates that corporate donations advance CEO interests and suggests misuses of corporate resources that reduce firm value.

Agency theory and profit maximization theory offer competing views on corporate philanthropic activities. Using hand-collected data, I evaluate these theories and find evidence more consistent with the agency theory. CEOs’ relation with nonprofit institutions, weaker alignment incentives of managers and weaker governance structure increase the likelihood and amount of corporate giving in general and foundation giving (which is a more stable source of donations) in particular. To analyze whether private benefits of corporate giving are optimally factored into CEO compensation, I develop an instrumental variable framework to address the direction of relation between compensation and firm donations. By using natural disasters as an instrument of corporate giving, I find that CEOs use firm donations to insulate their compensation particularly by supporting causes related to directors’ interests. Results also show that corporate giving reduces stock returns by lowering the marginal dollar value of cash. Lastly, negative stock price reaction to the news of unexpected firm donations further confirms the agency theory of corporate giving.