Promotion Tournaments and Capital Rationing

Posted: 3 Jan 2009

See all articles by Bing Han

Bing Han

University of Toronto, Rotman School of Management

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

John C. Persons

Independent

Multiple version iconThere are 2 versions of this paper

Date Written: January 2009

Abstract

We analyze capital allocation in a conglomerate where divisional managers with uncertain abilities compete for promotion to CEO. A manager can sometimes gain by unobservably adding variance to divisional performance. Capital rationing can limit this distortion, increase productive efficiency, and allow the owner to make more accurate promotion decisions. Firms for which CEO talent is more important for firm performance are more likely to ration capital. A rationed manager is more likely to be promoted even though all managers are identical ex ante. When the tournament payoff is relatively small, offering an incentive wage can be more efficient than rationing capital; however, when tournament incentives are paramount, rationing is more efficient.

Keywords: G30, G31, G39

Suggested Citation

Han, Bing and Hirshleifer, David A. and Persons, John C., Promotion Tournaments and Capital Rationing (January 2009). The Review of Financial Studies, Vol. 22, Issue 1, pp. 219-255, 2009. Available at SSRN: https://ssrn.com/abstract=1320566 or http://dx.doi.org/hhn085

Bing Han

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John C. Persons

Independent

No Address Available

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