A Dark Side of Industry Tournament Incentives

57 Pages Posted: 11 Nov 2019 Last revised: 8 Jul 2020

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 26, 2020

Abstract

Are firms’ financial disclosure decisions affected by executive compensation at other firms? We find that a CEO’s pay gap relative to the highest CEO pay among industry peers, defined as industry tournament incentives, can lead to distortions in corporate financial disclosures. Our analyses show that controlling for CEO-firm pair fixed effects, firms run by CEOs with stronger industry tournament incentives engage in more earnings manipulation, measured by a higher propensity to meet or narrowly beat consensus earnings forecasts, larger abnormal accruals, and a higher probability of committing financial misrepresentation and restating earnings. The evidence is concentrated in cases where ex ante CEOs are more likely to participate in the industry tournament, and where agency problems are more severe. Conditional on firm performance, CEOs with stronger industry tournament incentives also disclose positive (negative) news 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: Industry tournament incentives, managerial labor market, financial disclosure, benchmark beating, earnings management

JEL Classification: G30, J31, J33, J44, M41

Suggested Citation

Huang, Qianqian and Jiang, Feng and Xie, Fei, A Dark Side of Industry Tournament Incentives (June 26, 2020). European Corporate Governance Institute – Finance Working Paper No. 684/2020, Available at SSRN: https://ssrn.com/abstract=3478660 or http://dx.doi.org/10.2139/ssrn.3478660

Qianqian Huang (Contact Author)

City University of Hong Kong ( email )

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Feng Jiang

University at Buffalo - School of Management ( email )

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Fei Xie

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

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