Tournament Incentives and IPO Failure Risk

51 Pages Posted: 11 Feb 2019 Last revised: 28 May 2021

See all articles by Gonul Colak

Gonul Colak

University of Sussex ; Hanken School of Economics

Dimitrios Gounopoulos

University of Bath

Georgios Loukopoulos

Strathclyde Business School

Panagiotis Loukopoulos

University of Strathclyde

Date Written: May 22, 2021


This study tests the proposition that higher tournament incentives play a major role in lowering the failure risk of Initial Public Offerings (IPOs). Measuring tournament incentives as the pay gap between the CEO and its subordinate executives, we find that an interquartile change in the distribution of the CEO pay gap translates into a decline in failure risk probability by approximately 27%. The results are driven by the long-term rather than the short-term component of exective pay. Our results hold in an instrumental-variable setting that exploits exogenous variation in the likelihood of employing intra-firm, tournament-based, promotion incentives. Cross-sectional tests indicate that the negative link between tournament incentives and IPO failure is more pronounced when internal promotion contests are more likely to occur. Finally, we document that CEO pay gap is associated with superior long-run operating performance and greater investment efficiency.

Keywords: CEO Pay Gap, Tournament Incentives, Initial Public Offerings, IPO Survival

JEL Classification: G24, G30, G31, G32, J31, J33, L25

Suggested Citation

Colak, Gonul and Gounopoulos, Dimitrios and Loukopoulos, Georgios and Loukopoulos, Panagiotis, Tournament Incentives and IPO Failure Risk (May 22, 2021). Journal of Banking and Finance, Forthcoming, Available at SSRN: or

Gonul Colak

University of Sussex ( email )

Jubilee Building
Brighton, BN1 9SN
United Kingdom

Hanken School of Economics ( email )

P.O. Box 479
Arkadiankatu 22
FI-00100 Helsinki, 00100

Dimitrios Gounopoulos (Contact Author)

University of Bath ( email )

School of Management,
Wessex House, Claverton Down
Bath, BA2 7AY
United Kingdom

Georgios Loukopoulos

Strathclyde Business School ( email )

199 Cathedral Street,
Stenhouse Wing 3.17
Glasgow, G4 0QU

Panagiotis Loukopoulos

University of Strathclyde ( email )

Curran Building
100 Cathedral Street
Glasgow G4 0LN
United Kingdom

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