Shiva Rajgopal

A stark contrast exists between the stated preferences of politicians in the so-called blue states (Democrats) and those in red states (Republicans) on environmental, social, and governance (ESG) matters. We examine whether these polarized political stances are reflected in the investment strategies of respective states’ pension funds. We examine a Texas directive that the state agencies divest from investment companies that profess a pro-ESG stance and allegedly “boycott” energy stocks. We find that funds banned by the Texas directive, despite carrying ESG-focused titles, are largely indexers with a tilt slightly away from energy stocks and slightly toward technology stocks. Banning such funds would make little difference to Texas pensioners or Texas energy companies, because the returns and stock holdings of banned funds are not meaningfully different from those of size-matched funds that do not proclaim an ESG focus. Pension funds in red states do not act per their politicians’ stance and largely follow market trends in their investment strategies. They have similar exposures to technology and energy stocks, as do pension funds in blue states. We conclude that the vehement pro– and anti–fossil fuel proclamations of blue and red states’ politicians, respectively, are not observed in their own state pension funds’ investment policies over which politicians have better control than on external funds. This paper was accepted by Ranjani Krishnan, accounting. Funding: The authors acknowledge financial support from the Social Sciences and Humanities Research Council of Canada. A. Srivastava acknowledges financial support from the Canada Research Chairs Program of the Government of Canada. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.05180 .

This study revisits the CEO pay-for-performance relation using two methodological innovations designed to address well-known measurement challenges. First, we aggregate pay and performance over the CEO’s entire tenure, allowing us to account for ex post settling up in pay. Second, we use realized compensation rather than ex ante estimates to better capture the actual economic rewards that CEOs receive. We find strong evidence of pay for performance in the full sample with a magnitude 2–10 times greater than that reported in previous studies. However, the pay-for-performance relation is asymmetric. CEOs who outperform their peer firms exhibit strong pay-for-performance sensitivity; those who underperform do not. This asymmetry arises because boards offset weak performance with incremental equity grants, undoing the mechanical correlation that results from declining stock prices. Finally, we show that underperforming CEOs are significantly more likely to be dismissed, suggesting that turnover, rather than lower pay, could be a disciplinary mechanism used by boards. Collectively, our findings demonstrate that tenure-aggregated realized pay better reveals how boards structure incentives and accountability over the full horizon of a CEO’s leadership. This paper was accepted by Ranjani Krishnan, accounting. Funding: We gratefully acknowledge financial support from Columbia Business School, Columbia University. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.04322 .

We document the disconnect between earnings expectations as captured in stock prices and the ultimate realization of earnings over long periods. To do so, we compare firms’ stock prices on the first trading day and the beginning of each year to the realized earnings over their remaining lifetime (RLTEP ratio). We document that the RLTEP ratio, averaged over long periods and over 15,000 U.S. domestic public firms, approximates one, suggesting that expectations match actuals in the aggregate. However, most firms fail to deliver an RLTEP ratio greater than one. Acquisition prices are the largest contributors to the RLTEP ratio, with many surviving firms failing to generate enough earnings even after operating for between 15 and 45 years. The RLTEP ratio for survivors is positively associated with the future RLTEP ratio, future lifetime wealth creation, and future lifetime stock returns. Significant returns-based wealth creation by firms in the short term does not persist in the long term unless it is supported by fundamental wealth creation (high past RLTEP ratio). This paper was accepted by Eric So, accounting. Funding: Financial support from SC Johnson Graduate School of Management, Cornell University, Columbia Business School, Columbia University, Binghamton University School of Management, and Haskayne School of Business, University of Calgary is gratefully acknowledged. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.03251 .

An important contemporary policy debate relates to whether climate risk significantly impacts a firm’s financial performance. Our examination of this debate leads to three key findings. First, a severe weather event knocks off 1.3% of an affected public firm’s market capitalization. Second, specific industries and certain time periods drive statistically significant stock price reactions. Moreover, firms that disclose climate risks tend to experience slightly smaller stock price reactions. Third, private companies are particularly susceptible to the negative financial impact of natural disasters. However, private firms exhibit greater resilience when they receive financial assistance from government programs and when they are diversified across geographies. We caution policymakers on disclosures aimed at regulating public firms’ disclosure of climate risks while the disproportionate financial impact of severe weather events potentially affects private firms. JEL: D03, G14, G18, G38, K22, K32, M41, M48.

Internally developed intangibles are not included in reported assets under U.S. generally accepted accounting principles. The omission of this increasingly important class of assets reduces the usefulness and relevance of financial statement analysis, conducted with reported values of equity and assets. Recent studies overcome this deficiency by capitalizing research and development (R&D) expenses to estimate the value of knowledge capital and by capitalizing selling, general, and administrative (SG&A) expenses to estimate the value of organization capital. Those two estimates are then added to reported values for financial statement analysis. For convenience, many studies rely on two rules of thumb and assume them to be equally applicable in all instances: (1) 30% of SG&A and 100% of R&D expenses are investments, and (2) the useful life of SG&A and R&D investments is three and five years, respectively. We propose a more flexible approach by estimating the capitalization and amortization parameters on an industry–year–specific basis. Our modified values of total assets and equity, inclusive of the value of capitalized intangibles, exhibit greater association with future returns and investments compared with as-reported values and values estimated with uniform rules of thumb. We provide a better estimate of intangible capital for the consumers of financial statements. This paper was accepted by Ranjani Krishnan, accounting. Funding: A. Srivastava and R. Zhao acknowledge financial support from the Social Sciences and Humanities Research Council of Canada. A. Srivastava acknowledges financial support from the Canada Research Chairs Program of the Government of Canada. A. Iqbal acknowledges financial support from the Canadian Securities Institute Research Foundation and Chartered Professional Accountants (Alberta) Education Foundation. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.01703 .

We study carbon-reduction pledges of publicly traded U.S. oil exploration and production (E&P) companies. Of the 69 firms in the sample, 18 have committed to net-zero carbon targets, 14 have announced significant emissions cuts, whereas the remaining 37 firms have not announced any formal commitment to reduce emissions. We find that a firm’s energy production and ownership by BlackRock is positively associated with its decision to announce a net-zero pledge or significant emission cuts. E&P firms are likely to announce such commitments after Engine No. 1 proposed its slate of directors for Exxon’s board. The stock market reacts more negatively to net-zero pledges relative to emission-reduction pledges on average. However, the market reaction is related to the quality and credibility of these pledges. In particular, we find that the negative market reaction to net-zero pledges is mainly driven by firms with post-2030 target years relative to firms that commit to achieving net zero by 2030. We also find that the market reacts more negatively to net-zero pledges when the firm does not show the strength of its commitment via the presence of a board-level committee to monitor the company’s progress toward its emission goals or when the top management’s pay is not linked to specific emission reduction goals. This paper was accepted by Ranjani Krishnan, accounting. Funding: The research was funded by Columbia Business School. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4765 .

Investment funds that claim to focus on socially responsible stocks have proliferated in recent times. In this paper, we verify whether ESG mutual funds actually invest in firms that have stakeholder-friendly track records. Using a comprehensive sample of self-labelled ESG mutual funds (as identified by Morningstar) in the United States from 2010 to 2018, we find that these funds hold portfolio firms with worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years. Relative to other funds offered by the same asset managers in the same years, ESG funds hold stocks that are more likely to voluntarily disclose carbon emissions performance but also stocks with higher carbon emissions per unit of revenue. Despite these findings, ESG funds hold portfolio firms with higher average ESG scores. We show that ESG scores are correlated with the quantity of voluntary ESG-related disclosures but not with firms’ compliance records or actual levels of carbon emissions. Finally, ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees. Our findings suggest that socially responsible funds do not appear to follow through on proclamations of concerns for stakeholders.

We obtain survey responses from 168 North American CFOs and interview 16 of them to understand (i) how foreign currency exposure is measured and reported inside and outside the firm; (ii) how goal setting, performance evaluation and compensation of managers reflect exchange rate impacts, (iii) what specific currency exposures firms hedge and why? To develop expected answers to these questions, we provide a series of exhibits of hypothetical transactions at, and financial reports for, the foreign subsidiary. We benchmark these theoretical insights against the survey responses and uncover several questionable managerial choices and practices. First, although no performance measure is insulated from a currency impact, a large majority of senior managers and board members only review translated USD data, especially cash flows, that are fraught with significant measurement error. Second, companies are more likely to communicate, both inside and outside, the currency impact on net income and revenue but not on operating costs, operating or (free) cash flows, the balance sheet and all profitability measures. Hence, almost all decision makers, especially investors, will be unable to readily isolate the portion of the firm’s performance attributable to currency changes. Third, many of the current practices used to (i) set budgeted exchange rates for planning; (ii) hold local managers accountable for currency fluctuations; and (iii) manage foreign currency risk are inconsistent both with one another and with theory. We hope our work furthers the understanding of currency exposure among students, academics and practitioners.