Ran GUO

We examine how relative performance evaluation (RPE) affects industry competition—a question relevant for corporate boards interested in incentivizing executives. Using U.S. airline data, we estimate a dynamic game of competition between heterogeneous firms in an oligopolistic market, with managers incentivized by RPE contracts. While RPE can induce a firm to compete more intensely by smoothing compensation, it also amplifies a firm’s cost efficiency relative to its peers and can weaken competition from inefficient firms. The first effect dominates in small markets and the second in median-sized markets. RPE has little effect in large, highly profitable markets.

We find evidence suggesting that similarity of political views between the CEO and independent directors (“political homophily”) encourages the CEO to share adverse information with the board. Firms with higher political homophily have lower stock price crash risk, are more likely to divest previously acquired assets with poor announcement returns, and write down loss-making assets. Furthermore, the effect of political homophily is complemented by strong shareholder governance which prevents friendly board from insulating the CEO in the case of ex post negative outcomes. Our identification utilizes the exogenous variation in political beliefs associated with the entry of a conservative television network in local markets. Our findings show that a friendly board facilitates CEO-board communication which is crucial for the board to function effectively in its advisory role.

We study firms’ hedging policies using U.S. electric utilities as a laboratory for our theoretical and empirical analysis. Our parsimonious model of risk management highlights a tension between financial and operational hedging. The former reallocates risk to specialized investors, which lowers the firm’s cost of financing but also decreases the firm’s subsequent incentives to reduce risk by undertaking the latter. We provide evidence consistent with the model’s predictions. In particular, we document a financial hedge overhang: firms that hedge via financial contracts subsequently engage in less operational hedging (e.g., storing gas inventory).