The Dark Side of Industry Tournament Incentives

Posted: 18 Mar 2014 Last revised: 5 Jul 2019

See all articles by Qianqian Huang

Qianqian Huang

City University of Hong Kong

Feng Jiang

University at Buffalo - School of Management

Fei Xie

University of Delaware - Lerner College of Business and Economics; European Corporate Governance Institute (ECGI)

Date Written: June 24, 2019

Abstract

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

Suggested Citation

Huang, Qianqian and Jiang, Feng and Xie, Fei, The Dark Side of Industry Tournament Incentives (June 24, 2019). Available at SSRN: https://ssrn.com/abstract=2409918 or http://dx.doi.org/10.2139/ssrn.2409918

Qianqian Huang

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
852-3442-0284 (Fax)

Feng Jiang

University at Buffalo - School of Management ( email )

344 Jacobs Management Center
Buffalo, NY 14260
United States
716-645-3225 (Phone)

Fei Xie (Contact Author)

University of Delaware - Lerner College of Business and Economics ( email )

42 Amstel Ave
Newark, DE 19716
United States
(302) 8313811 (Phone)

HOME PAGE: http://sites.google.com/site/feisresearch/

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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