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The Effects of Promotion Incentives on Delegated Investment Decisions: A Note

Posted: 24 Aug 1998  

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

Abstract

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

Suggested Citation

Fargher, Neil L. and Rankin, Frederick W. and Sayre, Todd L., The Effects of Promotion Incentives on Delegated Investment Decisions: A Note. Journal of Management Accounting Research, 1998. Available at SSRN: https://ssrn.com/abstract=117859

Neil L. Fargher (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Frederick W. Rankin

Colorado State University, Fort Collins - College of Business ( email )

Fort Collins, CO 80523
United States

Todd L. Sayre

University of San Francisco - School of Business and Management ( email )

San Francisco, CA 94117
United States

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