Promotion Tournaments and Capital Rationing

Han, Bing; Hirshleifer, David; Persons, John C.

doi:10.2139/ssrn.848287

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Promotion Tournaments and Capital Rationing

Review of Financial Studies, Forthcoming

Dice Center Working Paper No. 2005-20

47 Pages Posted: 16 Nov 2005 Last revised: 19 Oct 2008

See all articles by Bing Han

Bing Han

University of Toronto, Rotman School of Management

David Hirshleifer

University of Southern California - Marshall School of Business - Finance and Business Economics Department; National Bureau of Economic Research (NBER)

John C. Persons

Independent

There are 2 versions of this paper

Date Written: October 1, 2005

Abstract

We analyze capital allocation in a conglomerate where divisional managers with uncertain abilities compete for promotion to CEO. A manager can sometimes gain by unobservably adding variance to divisional output. Capital rationing can limit this distortion, increase productive efficiency, and allow the owner to make more accurate promotion decisions. Firms in which the CEO has a greater span of control are more likely to use capital rationing. A rationed manager is more likely to be promoted even though all managers are identical ex ante. Overconfidence can increase a manager's likelihood of promotion and can even benefit the (fully rational) owner.

Keywords: promotion, tournaments, capital rationing, conglomerate, career concerns, managerial overconfidence

JEL Classification: C70, G30, G31, J41

Suggested Citation: Suggested Citation

Han, Bing and Hirshleifer, David and Persons, John C., Promotion Tournaments and Capital Rationing (October 1, 2005). Review of Financial Studies, Forthcoming , Dice Center Working Paper No. 2005-20 , Available at SSRN: https://ssrn.com/abstract=848287 or http://dx.doi.org/10.2139/ssrn.848287