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A Delaware case law recognized officers’ distinct fiduciary duties (OFDs) for the first time in 2009. I use this legal event as a natural experiment to examine the effect of OFDs on corporate acquisition decisions. I find that firms whose officers were protected from market discipline prior to 2009 experienced increased announcement-period abnormal stock returns after the event, mainly because post-event acquisitions by these firms created more synergies and reduced officers’ control. These firms also increased liability insurance premium expenditures, but reduced value-decreasing acquisition frequencies after the event. Furthermore, I find that the effect of OFDs is more pronounced at firms where officers are not directors (thus, do not have access to liability insurance), have wealth risk, face less product market competition, are insulated from the market for corporate control, or are able to avoid board monitoring. Overall results suggest that OFDs are a critical corporate governance mechanism that works in tandem with other disciplinary mechanisms.

Political activism positively affects firm innovation. Firms that support more politicians, politicians on Congressional committees with jurisdictional authority over the firms’ industries and politicians who join those committees innovate more. We employ instrumental variables estimation and a natural experiment to show a causal effect of political activism on innovation. The results are consistent with the hypothesis that political activism is valuable because it helps reduce political uncertainty, which, in turn, fosters firm innovation. Also consistent with this hypothesis, we show that politically active firms successfully time future legislation and set their innovation strategies in expectation of future legislative changes.Keywords: political contributions, innovation, investment policy, policy uncertainty

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.

We find that acquisitions exhibit less evidence of agency problems when the target possesses more intangible assets. Acquisitions of intangibles are associated with higher announcement returns, superior post-acquisition performance, and less free cash flow, mitigating empire-building concerns. They are also associated with increases in measures of volatility, risk, and managerial effort, mitigating risk aversion and quiet-life concerns. Our evidence suggests that managerial rents that lead to value-destroying acquisitions are mainly associated with tangible assets. Among non-agency-based theories of acquisitions, acquisitions of intangibles resemble a “like buys like” narrative, in which firms acquire targets with complementary technology and similar investment opportunities.

We find that corporate giving represents a private benefit of control that distorts corporate investment and financing activity, consistent with free cash flow agency theory. Corporate giving discourages managers from pursuing external financing, especially debt issuance, to minimize outside monitoring. It creates preferences for internally financed cash acquisitions for the same reason. These distortions reduce shareholder wealth. Following the 2003 dividend tax cut or hedge fund activism, corporate charitable contributions fall, while investment rises, suggesting suboptimal investment caused by managerial private benefit extraction. Merger announcements show negative stock market reactions that are more pronounced for acquirers with poor corporate governance.

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.