Tournament Incentives and Firm Credit Risk: Evidence from Credit Default Swap Referenced Firms

31 Pages Posted: 27 May 2020

See all articles by Lijing Du

Lijing Du

Towson University - Department of Finance

Jian Huang

Towson University - College of Business and Economics

Bharat A. Jain

Towson University

Date Written: July/August 2019

Abstract

In this paper, we evaluate the impact of managerial tournament incentives on firm credit risk in credit default swap (CDS) referenced firms. We find that intra‐firm tournament incentives are negatively related to credit risk. Our results suggest that tournament incentives reduce credit risk by alleviating the potential for underinvestment when managers are concerned about exacting empty creditors. Further, we find that tournament incentives decrease credit risk when internal governance is strong or product market competition is intense. Taken together, our results suggest that creditors perceive senior manager tournament incentives (SMTI) as a critical determinant of a firm's credit risk, particularly in settings where managerial risk aversion is high.

Keywords: credit default swaps, credit risk, internal governance quality, product market competition, tournament incentives

JEL Classification: G32, G34, J31

Suggested Citation

Du, Lijing and Huang, Jian and Jain, Bharat A., Tournament Incentives and Firm Credit Risk: Evidence from Credit Default Swap Referenced Firms (July/August 2019). Journal of Business Finance & Accounting, Vol. 46, Issue 7-8, pp. 913-943, 2019, Available at SSRN: https://ssrn.com/abstract=3604483 or http://dx.doi.org/10.1111/jbfa.12395

Lijing Du (Contact Author)

Towson University - Department of Finance ( email )

8000 York Road
Towson, MD 21252
United States

Jian Huang

Towson University - College of Business and Economics ( email )

8000 York Road
Towson, MD 21252
United States
410-704-3547 (Phone)
410-704-3454 (Fax)

Bharat A. Jain

Towson University ( email )

8000 York Road
Towson, MD 21252
United States
410-704-3542 (Phone)

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