Tournament Incentives, Firm Risk, and Corporate Policies
Georgia State University
University of Arizona - Department of Finance
June 1, 2011
Journal of Financial Economics (JFE), Forthcoming
This paper tests the proposition that higher tournament incentives will result in greater risk taking by senior managers in order to increase their chance of promotion to the rank of CEO. Measuring tournament incentives as the pay gap between the CEO and the next layer of senior managers, we find a significantly positive relation between firm risk and tournament incentives. Further, we find that greater tournament incentives lead to higher R&D intensity, firm focus, and leverage but lower capital expenditures intensity. Our results support the hypothesis that option-like features of intra-organizational CEO promotion tournaments provide incentives to senior executives to increase firm risk by following riskier policies. Finally, the compensation levels and structures of executives of financial institutions have received a great deal of scrutiny after the financial crisis. In a separate examination of financial firms, we again find a significantly positive relation between firm risk and tournament incentives.
Number of Pages in PDF File: 60
Keywords: Tournament incentives, Firm risk, Corporate policies
JEL Classification: G31, G32, G34, J31, J33, L14
Date posted: March 17, 2010 ; Last revised: September 1, 2011
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