Working Papers

Do Short-Term Incentives Affect Long-Term Productivity?
(with Heitor Almeida, Nuri Ersahin, Vyacheslav Fos, and Rustom M. Irani)
Revise & Resubmit, Review of Financial Studies
– Conferences: AFA (2022), EFA (2020), SFS Cavalcade (2020), Finance Organizations and Markets [FOM] Research Group (2019)
– ECGI Working Paper No. 662/2020, CEPR Discussion Paper DP13894 

Previous research shows that short-term incentives lead the firm to increase stock buybacks, reducing investments in capital and employment. It is natural to expect that such firms will cut their less productive projects first, with little or even a positive effect on firm-level productivity. Yet, using detailed plant-level Census data, we find that firms make cuts across the board irrespective of each plant’s productivity in response to short-term incentives. Unionization of the labor force drives these results by preventing firms from doing efficient downsizing, suggesting that stakeholders can amplify negative consequences of corporate short-termism.

The Role of Assets in Place: Loss of Market Exclusivity and Investment
(with Matt Higgins, Ji Min Park, and Joshua Pollet)
– Conferences: WFA (2021)]
– NBER Working Paper No. w27588

We utilize a novel identification strategy to analyze the impact of assets in place on firms' decisions for future projects. We exploit the context in the pharmaceutical industry, where the loss of market exclusivity for a branded drug can be used to separate the impact of cash flows generated by a firm's current assets in place from the characteristics of its future investment opportunities. We first show that around the exclusivity losses in our sample of large drugs, the affected firms' profitability drops significantly. The timing of this profitability decrease was predetermined many years ago, and therefore, arguably independent of current investment opportunities. Nevertheless, we find that R&D spending drops by approximately 25% over two years following the loss of exclusivity of these pre-existing drugs. We also find that stock repurchases and cash balances decline significantly. Our findings do not support the predictions of traditional capital budgeting, but are more consistent with the pecking order theory. These results further point to a lack of long-term lifecycle management that could mitigate the effect of predictable negative shocks to cash flows.

Innovation under Pressure
(with Heitor Almeida, Vyacheslav Fos, Po-Hsuan Hsu, and Kevin Tseng)
– Conferences: FIRS (2021), CICF (2021)

This paper shows that firms become more efficient at innovation activities when they face pressure to meet earnings per share (EPS) targets using stock repurchases. Using a regression-discontinuity framework, we find that incentives to engage in “EPS-motivated buybacks” are followed by more citations and higher values for a firm’s new patents. We trace these effects to improved allocation of R&D resources and a greater focus on novel innovation. The positive effects are concentrated among ex-ante ‘innovation-efficient’ firms that achieve better patenting outcomes by reorganizing (but not cutting) R&D investments and paying for their EPS-motivated repurchases through reduced spending elsewhere. Our findings illustrate that short-term earnings pressures and resource constraints can spur managers to focus R&D spending more efficiently. 

Growth-promoting Bonuses and Mergers and Acquisitions 
(with Tor-Erik Bakke, Hamed Mahmudi, and Aazam Virani)

We study how growth-promoting bonuses - bonuses that are explicitly tied to size measures such as sales - impact firms' acquisition activity. Firms' whose executives are granted growth-promoting bonuses are more likely to do acquisitions. Acquisitions by such firms tend to destroy value for acquirers, as indicated by lower acquirer announcement returns. Lower acquirer returns appear to be a result of selecting targets with lower synergies and to a lesser extent, higher value transfers to targets. Among firms that grant growth-promoting bonuses, many would have missed their bonus goals without doing an acquisition. 

Does Equity-based Compensation Cause Firms to Manage Earnings Per Share?
(with Xing Gao)
– Awards: NFA 2018 Best Paper on Derivatives
– Conferences: WFA (2019), FMA (2018), NFA (2018)

Equity-based compensation causes increases in firms' share count and dilutes Earnings Per Share (EPS), which provides firms with an incentive to raise EPS using either share buybacks or earnings management. We employ a regression discontinuity framework to provide evidence of a causal link between equity-based pay and EPS management. Our tests compare firms experiencing dilution from ``just-in-the-money'' option exercises with firms whose options end up narrowly out-of-the-money. We find that firms engage in real- and accruals-based earnings management, but not buybacks, to boost EPS around these plausibly exogenous dilutive events. These effects are stronger when executives' bonuses depend directly on EPS.

Does Shareholder Scrutiny Affect Executive Compensation? Evidence from Say-on-Pay Voting
(with Shastri Sandy)
– Featured on the Harvard Law School Forum on Corporate Governance
– Conferences: SFS Cavalcade (2016), Young Scholars Finance Conference (2015), European Finance Association (2015), Paris December Finance Conference (2015), Northern Finance Association (2015), Financial Management Association (2014), Mid-Atlantic Research Conference (2014)]

We study whether shareholder scrutiny affects CEO pay. Our identification strategy exploits the fact that recent "say-on-pay" regulation allowed firms to hold votes every two or three years. Depending on their voting frequency, firms experience alternating years where scrutiny on compensation varies following a plausibly exogenous cyclical pattern. In vote-years, firms reduce salaries and golden parachutes, but compensate for these cuts by increasing less-scrutinized compensation such as pensions. Total pay is similar across vote and no-vote years, and pay-for-performance is not stronger in vote years. These results are most consistent with greater window-dressing of compensation in times when firms are subject to heightened shareholder scrutiny.

Older Working Papers:

The Market Reaction to Stock Split Announcements: Earnings Information After All (with Alon Kalay)