Product Market Competition, Managerial Incentives and Firm Valuation

36 Pages Posted: 1 Mar 2011

See all articles by Stefan Beiner

Stefan Beiner

University of Basel; University of Oxford - Said Business School

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance; University of St. Gallen - School of Finance

Gabrielle Wanzenried

Institut für Finanzdienstleistungen Zug (IFZ)

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2011

Abstract

This paper contributes to the very small empirical literature on the effects of competition on managerial incentive schemes. Based on a theoretical model that incorporates both strategic interaction between firms and a principal agent relationship, we analyse the relationship between product market competition, incentive schemes and firm valuation. The model predicts a nonlinear relationship between the intensity of product market competition and the strength of managerial incentives. We test the implications of our model empirically based on a unique and hand-collected data set comprising over 600 observations on 200 Swiss firms over the 2002-2005 period. Our results suggest that, consistent with the implications of our model, the relation between product market competition and managerial intensive schemes is convex indicating that above a certain level of intensity in product market competition, the marginal effect of competition on the strength of the incentive schemes increases in the level of competition. Moreover, competition is associated with lower firm values. These results are robust to accounting for a potential endogeneity of managerial incentives and firm value in a simultaneous equations framework.

Keywords: product market competition, strategic interaction, principal agent relationship, managerial incentives, firm valuation, G30, J33, L1

Suggested Citation

Beiner, Stefan and Schmid, Markus and Wanzenried, Gabrielle, Product Market Competition, Managerial Incentives and Firm Valuation (February 28, 2011). European Financial Management, Vol. 17, No. 2, pp. 331-366, 2011. Available at SSRN: https://ssrn.com/abstract=1773267 or http://dx.doi.org/10.1111/j.1468-036X.2009.00505.x

Stefan Beiner (Contact Author)

University of Basel ( email )

Holbeinstrasse 12
Basel, CH-4051
Switzerland

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

Markus Schmid

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, 9000
Switzerland

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Gabrielle Wanzenried

Institut für Finanzdienstleistungen Zug (IFZ) ( email )

Zug, CH-6304
Switzerland

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