Industry Tournament Incentives

Review of Financial Studies, Forthcoming

61 Pages Posted: 15 Mar 2012 Last revised: 22 Jun 2017

See all articles by Jeffrey L. Coles

Jeffrey L. Coles

University of Utah - Department of Finance; Arizona State University (ASU) - Finance Department

Zhichuan Frank Li

University of Western Ontario - Ivey School of Business

Yan Albert Wang

Auburn University

Date Written: August 20, 2013

Abstract

We model and empirically assess industry tournament incentives for CEOs. The measures we develop for the tournament prize derive from the compensation gap between the CEO at her firm and the highest-paid CEO among similar competing firms. The model predicts that firm performance and risk increase in the external pay gap, with these incentive effects increasing in the probability of the executive winning the tournament. GMM-IV estimates indicate that the external, industry pay gap is reliably and positively associated with firm performance and risk and with the riskiness of investment and financial policy. The effect of the industry tournament incentive is stronger when empirical proxies indicate the probability of the executive winning is higher.

Keywords: Industry tournament incentives, CEO incentives, CEO compensation, Firm performance, Firm risk

JEL Classification: G31, G32, G34, J31, J33, L25

Suggested Citation

Coles, Jeffrey L. and Li, Zhichuan Frank and Wang, Yan Albert, Industry Tournament Incentives (August 20, 2013). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2021947 or http://dx.doi.org/10.2139/ssrn.2021947

Jeffrey L. Coles (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
P.O. Box 873906
Tempe, AZ 85287-3906
United States
480-965-4475 (Phone)
480-965-8539 (Fax)

Zhichuan Frank Li

University of Western Ontario - Ivey School of Business ( email )

1151 Richmond Street North
London Ontario, Ontario N6A 3K7
Canada

Yan Albert Wang

Auburn University ( email )

315 Lowder Hall
Department of Finance
Auburn, AL 36849
United States

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