The Effect of Local Tournament Incentives on Firms’ Performance, Risk-Taking Decisions, and Financial Reporting Decisions

71 Pages Posted: 6 Jul 2016 Last revised: 23 Jun 2019

See all articles by Matthew Ma

Matthew Ma

Southern Methodist University (SMU)

Jing Pan

Southern Methodist University

Stephen Stubben

University of Utah

Date Written: November 1, 2017

Abstract

This study documents the existence of local employment preferences for corporate executives and examines how the compensation of executives’ local peers affects their own performance, risk-taking decisions, and financial reporting decisions. We find that external hires of new CEOs (CFOs) are five (eight) times more likely to be from local firms than non-local firms. We also find that local tournament incentives—as proxied by the pay gap between an executive and higher-paid executives in the area—are associated with stronger performance, greater risk taking, and more financial misreporting. We find consistent results using a difference-in-difference analysis that exploits plausibly exogenous variation in local tournament incentives caused by the sudden death of a local CEO. Our findings are consistent with executives taking actions to compete for a promotion to a nearby firm with higher pay. In addition, we find the effect of local tournament incentives is larger when local mobility is greater and executives’ local preferences are stronger.

Suggested Citation

Ma, Matthew and Pan, Jing and Stubben, Stephen, The Effect of Local Tournament Incentives on Firms’ Performance, Risk-Taking Decisions, and Financial Reporting Decisions (November 1, 2017). Available at SSRN: https://ssrn.com/abstract=2803054 or http://dx.doi.org/10.2139/ssrn.2803054

Matthew Ma (Contact Author)

Southern Methodist University (SMU) ( email )

6212 Bishop Blvd.
Dallas, TX 75275
United States

Jing Pan

Southern Methodist University ( email )

Cox School of Business
6212 Bishop Blvd
Dallas, TX 75275
United States

Stephen Stubben

University of Utah ( email )

1655 E. Campus Center
Salt Lake City, UT 84112
United States

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