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The Real Effects of Tournament Incentives: The Case of Firm Innovation

50 Pages Posted: 17 Feb 2016 Last revised: 31 Jan 2017

Ning Jia

Tsinghua University - School of Economics & Management

Xuan Tian

Tsinghua University - PBC School of Finance

Weining Zhang

Cheung Kong Graduate School of Business

Date Written: February 15, 2016

Abstract

This paper examines the effects of promotion-based tournament incentives for non-CEO executives on corporate innovation. We find that firms with greater tournament incentives, which are measured as the pay gap between the CEO and other executives, are associated with a higher level of patent quantity and quality, innovation efficiency, and patent importance and novelty. An instrumental variable approach suggests that the observed relations are unlikely to be caused by endogeneity in tournament incentives. The attraction of talent and the reduction in excessive board interventions appear two plausible underlying mechanisms through which tournament incentives promote firm innovation. Our paper highlights the importance of inter-executive incentive scheme design in encouraging technological innovation.

Keywords: Tournament incentives, executive compensation, innovation, human capital, board monitoring

JEL Classification: G30; G34; J31; J33; O32

Suggested Citation

Jia, Ning and Tian, Xuan and Zhang, Weining, The Real Effects of Tournament Incentives: The Case of Firm Innovation (February 15, 2016). Kelley School of Business Research Paper No. 16-21. Available at SSRN: https://ssrn.com/abstract=2732911 or http://dx.doi.org/10.2139/ssrn.2732911

Ning Jia

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Xuan Tian (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

Weining Zhang

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

HOME PAGE: http://english.ckgsb.edu.cn/FacultyResearch/Faculty/Accounting/ZhangWeining.aspx

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