Tournament Incentives and Reserve Management

50 Pages Posted: 12 Jan 2020

See all articles by Ahmet Nart

Ahmet Nart

University of North Carolina (UNC) at Charlotte

Gene C. Lai

Washington State University - Department of Finance, Insurance and Real Estate

Chia-Ling Ho

Bank Taiwan Life Insurance; Tamkang University

Date Written: December 03, 2019

Abstract

This paper examines the relation between tournament incentives and reserve management. We find a positive relation between internal tournament incentives and reserve errors, implying that a larger pay gap as a tournament prize induces vice presidents (VPs) to overestimate loss reserves. In other words, a higher tournament prize is associated with conservative loss reserve management. Unlike the literature, we do not find a positive relation between tournament incentive and profits (risk taking behavior). Taken together, the evidence indicates that VPs focus on strong financial health of the firm instead of its profitability. In addition, we find the impact of internal tournament incentives on the reserve error is more pronounced for larger, financially weak and more geographically focused firms, and is mitigated for the firms with higher percentage of claim loss reserve over total liability and paying relatively higher tax rates. Our results also suggest that SOX mitigates the conservative reserve behavior. Finally, we also find that as board independence enhances, VPs induced by promotion-based tournaments become more likely to have conservative reserve behavior.

Keywords: Internal tournament, Earnings management, Performance, Risk taking

JEL Classification: C23, G22, G32, G34, J31, J33, M41

Suggested Citation

Nart, Ahmet and Lai, Gene and Ho, Chia-Ling, Tournament Incentives and Reserve Management (December 03, 2019). Available at SSRN: https://ssrn.com/abstract=3504998 or http://dx.doi.org/10.2139/ssrn.3504998

Ahmet Nart (Contact Author)

University of North Carolina (UNC) at Charlotte ( email )

Charlotte, NC
United States

Gene Lai

Washington State University - Department of Finance, Insurance and Real Estate ( email )

Todd 470
Pullman, WA 99164-4746
United States

Chia-Ling Ho

Bank Taiwan Life Insurance ( email )

6F., No. 69, Sec. 2
Dunhua S. Rd.
Taipei, Da-an District 10682
Taiwan

Tamkang University ( email )

No.151, Yingzhuan Rd
Taiwan, Taipei Hsien 25137
China

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