Recent Delaware Chancery Court decisions that boards are self-interested in setting director compensation have focused scrutiny on the pay-setting process used by corporations. We examine the effect of peer benchmarking on director compensation decisions. Director pay relates positively to peer director pay, and firms paying their directors highly are selected as peers. Moreover, firm performance and board advising performance are positively related to the talent component and are generally unrelated to the self-serving component of the peer pay effect. The evidence indicates that firms use peer benchmarking to justify high compensation mainly to attract talented directors to enhance board quality.

We examine the effects of a temporary suspension of short-sale price tests on the options market. Consistent with the notion that put option trading substitutes for short selling, we find a significant reduction in put option volume. In addition, pressure on put option prices significantly declines, violations of the put-call parity become significantly less frequent, and option volume becomes less informed. Our findings add clarity to a long-standing debate on whether investors use options to circumvent equity short-selling restrictions.

We examine how the Sarbanes-Oxley Act (SOX) affects pre-repurchase earnings management and its association with post-repurchase firm performance. Unlike prior pre-SOX studies, our post-SOX results indicate that open-market repurchasers do not engage in pre-buyback downward accrual-based earnings management. Audit committee independence, reforms in corporate governance structures, and changes in executives’ equity holdings prompted by SOX may explain the findings. Post-SOX, the significant negative association between pre-repurchase abnormal accruals and post-repurchase performance disappears, the market reaction to repurchase announcements becomes significantly less favorable, and there is no evidence of any shift away from accrual-based to real earnings management.

We examine how research and development (R&D) incoming spillovers affect long-run firm performance following firms’ R&D increases. We use a stochastic frontier production method to capture R&D incoming spillover effects. Firms reaping more benefits from R&D investment made by other firms experience more improvement in profitability and more favorable long-run stock performance in the post-R&D-increase period. Firms with higher levels of R&D incoming spillovers recruit more key employees from other firms, suggesting that obtaining know-how through hiring is an important source of incoming spillovers. The evidence also shows that firms experiencing more R&D outgoing spillover effects tend to underinvest in R&D.

This paper examines the role of focus versus diversification in explaining the economic impact of corporate capital investments. I find that the stock market's responses to announcements of capital investments are more favorable for focused firms than for diversified firms. I also show that focused firms exhibit significantly better post-investment operating performance than diversified firms. The overall findings in this study suggest that the investment opportunities hypothesis dominates the internal capital markets hypothesis in terms of the net economic impact of capital investments on the investing firms.