The first chapter uses data on birthplaces of 2,065 Chief Executive Officers (CEO) and a county-level measure of cultural individualism based on the westward expansion in American history to establish a positive relation between CEO cultural individ- ualism and corporate innovation. Difference-in-differences estimations around CEO turnovers support the causality. Individualistic CEOs increase innovation by creating an innovative corporate culture, providing more flexibility to employees, and tolerance for failure.The second chapter develops a model to study the corporate board structure and communication. Outside directors are related to potential competitors. As a result, they can bring valuable advice and cause information leakage. The firm needs to decide whether to have outside directors on the board. In the presence of the outside director, the other directors need to determine whether to communicate.

The dissertation consists of three essays in financial economics. In the first essay, using historical prices for futures contracts tied to U.S. election outcomes, I develop a measure of firm-level partisan exposure. This measure captures the sensitivity of a firm's stock return to the changes in the odds of winning by a Democratic presidential candidate. I find that political beta is significantly lower in regulated industries and that it takes more extreme values for smaller and more highly levered firms. Finally, I document that firms with high political beta earn 4.0% higher annual buy-and-hold abnormal returns under Republican presidencies than firms with low political beta. The second essay studies mean monthly returns and compound long-run returns to over 64,000 global common stocks during the January 1990 to June 2020 period. The important practical distinctions between arithmetic, geometric, and dollar-weighted monthly returns are highlighted. In addition, it is documented that the majority, 56.6% of U.S. stocks and 61.3% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, the top-performing 1.5% of firms account for all of the $US 56.2 trillion in net global stock market wealth creation. Outside the US, less than one percent of firms account for the $US 20.1 trillion in net wealth creation. The third essay documents evidence of managerial influence on shareholder voting outcomes. There are significantly more proposals that narrowly pass than narrowly fail. This behavior is more pronounced for firms with low institutional ownership and for proposals receiving a negative ISS recommendation. Mechanisms by which managers influence the outcome, such as meeting adjournment and selective campaigning, are newly identified. Finally, the market reacts more positively to the narrow failure of management proposals than to their passage. Combined with a theoretical model, these results imply that managerial influence on the voting process is value-destroying.

By matching a CEO's place of residence in his or her formative years with U.S. Census survey data, I obtain an estimate of the CEO's family wealth and study the link between the CEO's endowed social status and firm performance. I find that, on average, CEOs born into poor families outperform those born into wealthy families, as measured by a variety of proxies for firm performance. There is no evidence of higher risk-taking by the CEOs from low social status backgrounds. Further, CEOs from less privileged families perform better in firms with high R&D spending but they underperform CEOs from wealthy families when firms operate in a more uncertain environment. Taken together, my results show that endowed family wealth of a CEO is useful in identifying his or her managerial ability.

I study how the density of executive labor markets affects managerial incentives and thereby firm performance. I find that U.S. executive markets are locally segmented rather than nationally integrated, and that the density of a local market provides executives with non-compensation incentives. Empirical results show that in denser labor markets, executives face stronger performance-based dismissal threats as well as better outside opportunities. These incentives result in higher firm performance in denser markets, especially when executives have longer career horizons. Using state-level variation in the enforceability of covenants not to compete, I find that the positive effects of market density on incentive alignment and firm performance are stronger in markets where executives are freer to move. This evidence further supports the argument that local labor market density works as an external incentive alignment mechanism.

Chief Executive Officers (CEOs) whose observed personal option-holding patterns are not consistent with theoretical predictions are variously described as overconfident or optimistic. Existing literature demonstrates that the investment and financing decisions of such CEOs differ from those of CEOs who do not exhibit such behavior and interprets the investment and financing decisions by overconfident or optimistic CEOs as inferior. This paper argues that it may be rational to exhibit behavior interpreted as optimistic and that the determinants of a CEO’s perceived optimism are important. Further, this paper shows that CEOs whose apparent optimism results from above average industry-adjusted CEO performance in prior years make investment and financing decisions which are actually similar, and sometimes superior to, those of unbiased CEOs.

I show that firms' ability to adjust variable capital in response to productivity shocks has important implications for the interpretation of the widely documented investment-cash flow sensitivities. The variable capital adjustment is sufficient for firms to capture small variations in profitability, but when the revision in profitability is relatively large, limited substitutability between the factors of production may call for fixed capital investment. Hence, firms with lower substitutability are more likely to invest in both factors together and have larger sensitivities of fixed capital investment to cash flow. By building a frictionless capital markets model that allows firms to optimize over fixed capital and inventories as substitutable factors, I establish the significance of the substitutability channel in explaining cross-sectional differences in cash flow sensitivities. Moreover, incorporating variable capital into firms' investment decisions helps explain the sharp decrease in cash flow sensitivities over the past decades. Empirical evidence confirms the model's predictions.

Mutual monitoring in a well-structured authority system can mitigate the agency problem. I empirically examine whether the number 2 executive in a firm, if given authority, incentive, and channels for communication and influence, is able to monitor and constrain the potentially self-interested CEO. I find strong evidence that: (1) measures of the presence and extent of mutual monitoring from the No. 2 executive are positively related to future firm value (Tobin's Q); (2) the beneficial effect is more pronounced for firms with weaker corporate governance or CEO incentive alignment, with stronger incentives for the No. 2 executives to monitor, and with higher information asymmetry between the boards and the CEOs; (3) such mutual monitoring reduces the CEO's ability to pursue the "quiet life" but has no effect on "empire building;" and (4) mutual monitoring is a substitute for other governance mechanisms. The results suggest that mutual monitoring by a No. 2 executive provides checks and balances on CEO power.

This dissertation analyzes the reliability of reported employee stock option (ESO) expense, the determination of expected life of ESOs, motivations to manipulate ESO expense, and the impact of noise in ESO expense on subsequent stock price returns. Based on unique data, this is the first paper to measure average historical ESO life for all employees of a broad set of firms. I find average life has a mean of 4.12 years. Average life is reduced by 0.38 years per 10 percentage point increase in volatility, and industry effects explain an additional 7% of the variation. Reported expected life increases 0.37 years per year of historical life and an additional 0.16 years per year of age of the outstanding options. Deviations of reported volatility and life from benchmarks have positive correlations with deviations from own reporting history. Using stated assumptions rather than benchmark assumptions drops (increases) ESO expense by 8.3% (17.6%) for the 25th (75th) percentile firm. The change in earnings per share decreases (increases) by $0.019 ($0.007) for the 25th (75th) percentile firm. Tests for motivations to manipulate stock option expense downward have mixed results. Absolute values of deviations from benchmarks have a positive relationship with subsequent stock price volatility suggesting noise in reported stock option expense results in stock price noise. Deviations from benchmarks and subsequent cumulative abnormal returns have statistically significant results but are difficult to interpret.