Each year, the federal government distributes $900 billion in grants to nonprofit organizations. Grants exceeding a specified threshold are reviewed by an auditor who is chosen by the recipient. Using a unique grant-level dataset covering $23.7 trillion in grants, we exploit a major. deregulatory reform that raised the threshold and exempted nearly 10% of grants from auditing. In a difference-in-differences framework, we find that treated auditors – who had clients below the new threshold before the reform – nearly ceased to issue negative audits for their remaining clients after the reform. Further tests show that treated auditors struggled to retain clients after the reform and offered more lax supervision to stay competitive. Thus, the deregulation of smaller grants unintentionally weakened the oversight of larger, non-deregulated grants. In a structural model, we identify key cost factors that discourage auditors from issuing negative opinions, especially when the demand for auditors declines. We estimate that the deregulation nearly doubled those costs, prompting auditors to show leniency even when clients potentially mismanage their grants. We evaluate alternative policies, such as subsidizing auditor costs or nationalizing the auditing process, to deregulate markets without compromising the quality of monitoring. Combined, our paper reveals the unintended contagion effect of deregulation, which can impose externalities on non-deregulated firms, service providers, and taxpayers.

This paper studies how imposing personal liability on directors and executives can mitigate corporate environmental externalities. I use a landmark court case that increased perceptions of out-of-pocket liability risk related to corporate releases of toxic chemicals. This change varied across Canadian provinces based on their legal systems, which I exploit in a difference-in-differences analysis. I find that imposing personal liability leads to a 23% reduction in toxic chemical releases. Treated small firms scale down operations while large firms invest in clean technology. This environmental benefit is accompanied by a 2.6% decrease in abnormal returns following the shock, as well as an increase in director turnover, particularly among the wealthiest directors and environmental experts who are the most exposed to liability risk. These findings contribute to the debate on the optimal level of personal liability to regulate corporate externalities.

We study the horizontal spillovers of gender quotas on corporate boards, i.e., the effects of quotas regulation on firms that are not directly subject to it (e.g., unlisted firms) but are connected to regulated companies through interlocking directorates. We examine the 2011 Italian law mandating gender quotas on boards of listed and state-controlled enterprises (target companies). We find that, after the reform, connected firms significantly increase the share of female board members compared to similar non-connected firms. The spillover effects are at least as large as the direct effects of the reform on the number of female directors in target firms. Our results suggest that, by forcing target companies to expand their search for directors beyond personal networks, the quotas law indirectly broadened the supply of candidates for connected firms. This is consistent with information sharing between target and connected firms. We find no evidence of increased demand for gender diversity in connected companies.