The Dark Side of Industry Tournament Incentives
Posted: 18 Mar 2014 Last revised: 5 Jul 2019
Date Written: June 24, 2019
We document distortions in corporate disclosure driven by industry tournament incentives, defined as a CEO’s pay gap relative to the highest CEO pay among industry peers. Controlling for CEO-firm pair fixed effects, we find that firms run by CEOs with stronger industry tournament incentives engage in more aggressive earnings manipulation, measured by a higher propensity of meeting or narrowly beating consensus earnings forecasts, larger abnormal accruals, and higher probabilities of committing financial misrepresentation and restating earnings. The evidence is concentrated in cases where ex ante CEOs are more likely to participate in or win the industry tournament, and where agency problems are more severe. Conditional on firm performance, CEOs with stronger industry tournament incentives also disclose positive (negative) more (less) frequently. Our findings imply that industry tournaments can create perverse managerial incentives in corporate disclosure decisions, and that one firm’s executive compensation policy can generate negative externality for other firms’ disclosure practice.
Keywords: Managerial labor market, Industry tournament incentives, Earnings management, Benchmark beating, Financial restatement
JEL Classification: G30, J31, J33, J44, M41
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