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 A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

John C. Persons

Independent

Multiple version iconThere 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

Han, Bing and Hirshleifer, David A. 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

Bing Han

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John C. Persons (Contact Author)

Independent

No Address Available

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