This paper develops a persuasion model examining a manager’s incentives to gather information when the manager can disseminate this information selectively to interested parties (“users”) and when the objectives of the manager and the users are not perfectly aligned. The model predicts that, if the manager can choose the subset of users to receive the information, then the manager may gather more precise information. The article identifies conditions under which a regime that allows managers to grant access to information selectively maximizes aggregate information. Strikingly, this happens when the objectives of managers and users are sufficiently misaligned. This finding is robust to variations of the model such as information acquisition cost, unobservable precision, sequential noisy actions taken by the users, and delayed choice of the subset of users in “the know.” The results call into doubt the common belief that unrestricted access to information to all potential users is beneficial.

This paper demonstrates a novel link between relationship-specific investments and risk in a setting where division managers operate under moral hazard and collaborate on joint projects. Specific investments increase efficiency at the margin. This expands the scale of operations and thereby adds to the compensation risk borne by the managers. Accounting for this investment-risk link overturns key findings from prior incomplete contracting studies. We find that, if the investing manager has full bargaining power vis-a-vis the other manager, he will underinvest relative to the benchmark of contractible investments; with equal bargaining power, however, he may overinvest. The reason is that the investing manager internalizes only his own share of the investment induced risk premium (we label this a "risk transfer"), whereas the principal internalizes both managers' incremental risk premia. We show that high pay-performance sensitivity (PPS) reduces the managers' incentives to invest in relationship-specific assets. The optimal PPS thus trades off investment and effort incentives.

Integrated ownership is often seen as a way to foster specific investments. However, even in integrated firms, managers invest to maximize their compensation which is chiefly driven by divisional income. Thus it is not clear that integration has any effect on investments in a world of decentralized decision-making. Building on recent findings that efficiency-enhancing investments raise not only the expected value of a project but also its variance, this paper shows that under plausible conditions integration calls for low-powered incentive contracts: the managers invest more as they are less exposed to the investment-related (endogenous) risk, and the principal of an integrated firm has more to gain from greater investment. On the other hand, integration may result in higher-powered incentives if the project is inherently very risky or if the project-specific input is personally costly to the managers (rather than a monetary investment). The qualitative takeaway remains, however, that the contract adjustments under integration mitigate any input distortions present under non-integration. We also allow for firmwide performance evaluation under integration and show that it may lead to larger input distortions, but those are outweighed by improved risk sharing.

This paper considers the optimal allocation of decision rights in an incomplete contracting setting where business unit managers choose inputs that enhance the efficiency of "joint projects" (projects that benefit their own and other divisions). With scalable project inputs, decision rights should be bundled in the hands of one division manager. Which of the managers to designate the investment center manager-the one facing the more volatile or the more stable environment-depends on whether the project input is a monetary investment or personally-costly effort. With discrete project specific inputs, on the other hand, it is always optimal to split decision rights symmetrically between the managers provided they face comparable levels of operating volatility. This runs counter to the conventional wisdom that bundling stimulates the provision of complementary inputs. The model also generates empirical predictions for the association of organizational structure and managers' relative incentive strength: bundling of decision rights results in PPS divergence across divisions; splitting them results in PPS convergence.

The aim of general purpose financial reporting is to provide information that is useful to investors, lenders, and other creditors. With this goal, regulators have tended to mandate increased disclosure. This paper shows that increased mandatory disclosure can weaken a firm's incentive to acquire and voluntarily disclose private information that is not amenable to inclusion in mandated reports. Specifically, the paper provides conditions under which a regulator, seeking to maximize the total amount of information provided to investors via both mandatory and voluntary disclosures, would mandate less informative and more conservative financial reports even in the absence of any direct costs of increasing informativeness. This result is robust to allowing the firm to make reports more informative and to imposing a nondisclosure cost or penalty on the firm. The results and comparative statics analysis contribute to the understanding of interactions between mandatory reporting and voluntary disclosure, and demonstrate a novel benefit to setting accounting standards that mandate imperfectly informative reports.

This paper studies the optimal dynamic contract that provides incentives for an agent (e.g., SPAC sponsor, VC general partner, CTO) to exploit investment opportunities/targets that arrive randomly over time via a costly search process. The agent is privy to the arrival as well as to the quality of the target and can take advantage of this for rent extraction during the search process and the ensuing production. The optimal contract provides the agent with incentives for timely and truthful reporting via a time-varying threshold for investment and an internal charge for the time spent on search. In the equilibrium, as time elapses, the charge becomes progressively higher while the investment threshold is progressively lower, resulting in overinvestment at a time-varying degree. The model generates empirically testable predictions regarding investments (such as M\&As, hedge fund activism, VC investing, SPACs, and internal innovations), linking the degree of overinvestment to observable firm and industry characteristics.

Extant analytical work studying investments in the presence of earnings manipulation typically considers either one-period models or models where manipulation has only short-term effects. However, beyond transitory misreporting of private information, manipulation can also occur through deviations from optimal operations to enhance short-term pay at the expense of long-term value a la "real earnings management". In this paper, we incorporate the long-term adverse consequences of such manipulation on firm value in a dynamic contracting model with capital investments. We find that designing an incentive-compatible contract that prevents manipulation with persistent effects comes at the cost of inefficient investments in working capital. Overinvestment is more likely in firms with high cash flow but low Tobin’s q. Our findings provide a theoretical explanation for the strong investment-to-cash-flow sensitivity and weak investment-to-q sensitivity observed in empirical studies.

We examine the trade-offs between dynamic choices related to capital and operational management. In our framework, the operational choice involves a risk-return tradeoff, such as costly risk management or monitoring, whereas the capital choice relates to the arrival of opportunities for the firm. We show that the joint consideration of these decisions is crucial, as capital and operational management interact in ways that have been largely overlooked in the literature. Prior models that treat one decision as exogenous generate monotonic predictions that have mixed empirical support. Our model helps explain nonmonotonic empirical relations by demonstrating that operational and capital management can function as either substitutes or complements. We characterize the conditions under which each relationship arises and provide testable predictions on how firms' operating and capital environments shape the trade-offs between these two dimensions. Finally, we discuss the implications of our results in the context of industries with specialized capital, such as real estate, transportation, banking, and private equity.