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After the public outcry over backdating, many firms began scheduling option grants. This eliminates backdating but creates other agency problems: Chief executive officers (CEOs) aware of upcoming option grants have an incentive to temporarily depress stock prices to obtain lower strike prices. We show that some CEOs have manipulated stock prices to increase option compensation, documenting negative abnormal returns before scheduled option grants and positive abnormal returns afterward. These returns are explained by measures of CEOs’ incentives and ability to influence stock prices. We document several mechanisms used to lower stock price, including changing the substance and timing of disclosures.

Proxy advisory and corporate governance rating firms play an increasingly important role in U.S. public markets. Proxy advisory firms provide voting recommendations to shareholders on proxy proposals and sometimes take an active role persuading management to change governance arrangements. Corporate governance rating firms provide indices to evaluate the effectiveness of a firm's governance and claim to be able to predict future performance, risk, and undesirable outcomes such as accounting restatements and shareholder litigation. We examine these claims for the commercial corporate governance ratings produced for 2005 by Audit Integrity, RiskMetrics (previously Institutional Shareholder Services), GovernanceMetrics International, and The Corporate Library. Our results indicate that the level of predictive validity for these ratings are well below the threshold necessary to support the bold claims made for them by these commercial firms. Moreover, we find no relation between the governance ratings provided by RiskMetrics with either their voting recommendations or the actual votes by shareholders on proxy proposals.

We study the effect of staggered boards on long-run firm value, using a natural experiment: a 1990 law that imposed a staggered board on all firms incorporated in Massachusetts. We find a significant and positive average increase in Tobin's Q among the Massachusetts treated firms, suggesting that staggered boards can be beneficial for early-life-cycle firms, which exhibit greater information asymmetries between insiders and investors. These results are validated using a larger sample of firms from the Investor Responsibility Research Center. In exploring possible channels for these effects, we find that the effects are stronger among innovating Massachusetts firms, particularly those facing greater Wall Street scrutiny. The evidence is consistent with staggered boards improving managers' incentives to make long-term investments.

I present evidence that Delaware corporate law improves firm value and facilitates the sale of public firms. Using Tobin?s Q as an estimate of firm value, I find Delaware firms are worth significantly more than similar firms incorporated elsewhere. The result is robust to controls for firm size, diversification, profitability, investment opportunity and industry. Delaware firms also receive significantly more takeover bids and are significantly more likely to be acquired. Firms with strong incentives to choose valuable legal regimes are likely to incorporate in Delaware when they go public. These results suggest that corporate law affects firm value.

This article focuses on the widely held views that antitakeover charter and bylaw provisions (ATPs) increase agency costs, thereby reducing firm value, but that firms going public minimize agency costs, thereby maximizing firm value. We show that these views cannot comfortably coexist: ATPs are common in a sample of IPO-stage charters and are no less common when the firm is backed by venture capitalists or leveraged buyout funds. Moreover, ATP use is not explained by two efficiency explanations of ATP use with theoretical support--target firms' need for bargaining power when a bid is made and the threat of managerial myopia. Rather, we find evidence that antitakeover protection is used to protect management when takeovers are most likely and management performance most transparent. We find no evidence, however, that ATPs are explained by managers' desire to protect unusually high private benefits. Copyright 2001 by Oxford University Press.

In the wake of the backdating scandal, many firms began awarding options at scheduled times each year. Scheduling option grants eliminates backdating, but creates other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates to obtain options with lower strike prices. We provide evidence that in recent years some CEOs manipulate stock prices to increase option compensation. We document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants. These returns are explained by measures of a CEO's incentive and ability to influence stock price. We document several mechanisms CEOs use to lower the strike price, including changing the substance and timing of the firm’s disclosures.

We test whether pornography causes divorce. Using state-level panel data on the divorce rate and sales of Playboy magazine, we document a strong cross-sectional and time-series relation between lagged sales of Playboy and the divorce rate. The simple correlation between divorce and sales lagged two years is 44 percent, with a T-statistic of 20. This large correlation is robust to using only the first half of the sample, adjusting for all state-level heterogeneity and for any time trends by including state and year fixed effects, and using an instrumental variable to correct for any possible endogeneity in Playboy sales. Divorce rates are also significantly correlated with sales of Penthouse but they are not correlated with sales of Time magazine. Our overall estimates suggest that pornography probably caused 10 percent of all divorces in the United States in the sixties and seventies.

We study the effect of the Securities Exchange Act of 1934 on common stock bid-ask spreads and other information measures. Among other things, the 1934 Act mandated a complete, audited income statement and balance sheet. Prior to the 1934 Act, some firms disclosed sales or depreciation, and some chose not to. Some firms reported audited financials; some did not. If disclosures and audits reduce information asymmetries, the 1934 Act should have a differential effect across these stocks. We find that a firm's disclosure status in 1933 has little to do with the evolution of its information measures. Overall, we find that cross-sectional differences in mandatory disclosure had little measurable effect on the degree of information asymmetry.

When a firm spins off a subsidiary, the parent managers create a governance structure for the spinoff and decide whether spinoff management will be protected by takeover defenses. We find evidence that agency costs at the parent firm level affect the adoption of takeover defenses for the spinoff. Takeover defenses are most common when parent managers have weak incentives to maximize firm value, and more common when parent managers would personally benefit by entrenching spinoff managers. Takeover defenses in spinoffs are also more common than in similar IPOs, where governance decisions are made by parties with substantial ownership stakes in the firm. We also find that many spinoff charters commonly contain takeover defenses that are prohibited at the parent firm, thus effectively undercutting parent shareholders' rights. Finally, we find that this entrenchment reduces share value in the parent.

CEO compensation varies widely, even within industries. In this paper, we investigate whether differences in skill explain these differences in CEO pay. Using the idea that skilled CEOs should be more likely to continue prior good performance and more likely to reverse prior poor performance, we develop a new methodology to detect whether skill is related to pay. We find that highly paid CEOs are more skilled than their less well paid peers when pay is performancebased and when there is a large shareholder. This detected link between pay and skill is strong even when we examine industry-wide declines: highly paid CEOs are more likely to reverse the firm's fortunes. We also examine CEO turnovers and show that the firm's post-turnover performance is related to differences between the two CEO's pay levels. These results highlight conditions where pay and skill are linked, and hence identify firms where high pay appears to have no justification.

Multiple line insurance companies perform two basic functions: underwriting and investment. One of the unresolved problem areas in the operation of these companies concerns the relationship between investment portfolio management and the insurance underwriting operation. That there is no consensus among company managements regarding the nature of the constraints placed on portfolio managers is apparent upon examination of the widely divergent practices of multiple line insurance. This study is an attempt to explain these divergent practices by answering the query, "What quantifiable characteristics of companies are associated with their ability to assume portfolio risk?" Specifically, the purpose of this study has been to measure statistically the influence of a number of variables (relating to the underwriting and risk taking capacity of insurers) upon the common stock ratio of a sample of thirty-one stock multiple line insurance companies. Growth in the property-liability insurance industry has been of enormous proportions in the United States during the past twenty-five years. The problems of company management that come with this growth of insurance are of similar proportions. One of these problems is the investment of insurance company funds. Unlike an investment trust, the investment department of a multiple line insurance company is an integral part of an institution actively engaged in writing insurance. Thus there are factors in developing investment strategies other than an appraisal of the investment outlook. One of the unresolved problem areas in the operation of these companies concerns the relationship between investment portfolio manRobert H. Daines, D.B.A., is Associate Professor and Director of the M.B.A. program in Brigham Young University. Prior to his present position, Dr. Daines was a member of the faculty of Indiana University and of the State University of Iowa. This article was submitted in September, 1967. agement and the insurance underwriting operation. That there is no consensus in the industry regarding the nature of the constraints placed on portfolio managers by the underwriting function is apparent upon examination of the widely divergent investment practices of multiple lines insurers. A basic assumption of this study is that the principal ambiguity that needs to be clarified before decisions are feasible as to appropriate investment strategies is that of capacity for risk taking. In light of a multiple line insurance company's ability to assume risk, there have arisen in the literature several guiding principles based upon the insurance operation, which are purported to be major influences on a company's capacity to invest in common stock. The significance of these functional relationships has been statistically tested for a selected group of thirty-one stock insurers. Using regression and multiple regression analysis, other variables which