Tournament Incentives, Firm Risk, and Corporate Policies

60 Pages Posted: 17 Mar 2010 Last revised: 1 Sep 2011

Omesh Kini

Georgia State University

Ryan Williams

University of Arizona - Department of Finance

Date Written: June 1, 2011

Abstract

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.

Keywords: Tournament incentives, Firm risk, Corporate policies

JEL Classification: G31, G32, G34, J31, J33, L14

Suggested Citation

Kini, Omesh and Williams, Ryan, Tournament Incentives, Firm Risk, and Corporate Policies (June 1, 2011). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1571592

Omesh Kini (Contact Author)

Georgia State University ( email )

University Plaza
Atlanta, GA 30303-3083
United States
404-651-2656 (Phone)

Ryan Williams

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

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