The Effects of Promotion Incentives on Delegated Investment Decisions: A Note
Neil L. Fargher
Australian National University (ANU)
Frederick W. Rankin
Colorado State University, Fort Collins - College of Business
Todd L. Sayre
University of San Francisco - School of Business and Management
Journal of Management Accounting Research, 1998
We report the results of an experiment designed to examine investment project selection under promotion incentives, modeled as tournament contracts. For a given expected return, the owner prefers investments with lower systematic risk. Therefore, to the extent managers select investments other than those yielding the highest risk-adjusted rates of return, they diverge from what the owner desires. In the presence of promotion incentives, we identify a situation in which the maximization of expected compensation by managers is incompatible with their selection of investment projects that maximize the risk-adjusted rate of return. The results indicated that subjects recognize the strategic implications of alternative promotion scenarios and respond to them in an opportunistic fashion.
JEL Classification: J33, G31
Date posted: August 24, 1998
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