Buying Bad Behavior: Tournament Incentives and Securities Class Action Lawsuits

Strategic Management Journal, 2015

25 Pages Posted: 11 Jul 2015

See all articles by Wei Shi

Wei Shi

University of Miami; University of Miami - Department of Management

Brian L. Connelly

Auburn University

Wm. Gerard Sanders

Jones Graduate School of Management, Rice University

Date Written: July 11, 2015

Abstract

Tournament theory suggests that a large gap in pay between CEOs and top managers can provide incentives to perform, but we argue that it can also elicit negative effort and even motivate the kind of behavior that leads to lawsuits. We posit that this negative effort is greater when firms have high levels of unrelated diversification because there is less operational interdependency, so tournament effects are stronger. We also contend that the influence of tournament incentives on behavior leading to lawsuits is weaker when environmental uncertainty is high. We discuss the consequences of these findings for research on fraud and tournament theory as well as the practical repercussions for firms, investors, and policymakers.

Keywords: pay dispersion; securities lawsuits; tournament theory; top management team; organizational misconduct

JEL Classification: G30; J33

Suggested Citation

Shi, Wei and Shi, Wei and Connelly, Brian L. and Sanders, Wm. Gerard, Buying Bad Behavior: Tournament Incentives and Securities Class Action Lawsuits (July 11, 2015). Strategic Management Journal, 2015, Available at SSRN: https://ssrn.com/abstract=2629566

Wei Shi (Contact Author)

University of Miami ( email )

FL FL
United States

University of Miami - Department of Management ( email )

United States

Brian L. Connelly

Auburn University ( email )

Auburn, AL 36849
United States
344-844-6515 (Phone)

Wm. Gerard Sanders

Jones Graduate School of Management, Rice University ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
70
Abstract Views
779
rank
455,154
PlumX Metrics