TY - JOUR
T1 - Tournament incentives, firm risk, and corporate policies
AU - Kini, Omesh
AU - Williams, Ryan
N1 - Funding Information:
We thank Mark Chen, Gerry Gay, Lixin Huang, Linlin Ma, Reza Mahani, Vikram Nanda, Lalitha Naveen, Michael Rebello, and Chip Ryan for helpful comments. We are particularly indebted to Lalitha Naveen for her help in handling the transition in ExecuComp due to accounting changes imposed by the Financial Accounting Standards Board (FAS123R). We are also grateful to the referee (Jeffrey Coles) whose comments enabled us to significantly improve the paper. We thank Bunyamin Onal for providing excellent research assistance. Ryan Williams acknowledges research support from the Center for the Economic Analysis of Risk (CEAR), the Max Burns Fellowship, and the Steven Smith Fellowship. The usual disclaimer applies.
PY - 2012/2
Y1 - 2012/2
N2 - This paper tests the proposition that higher tournament incentives will result in greater risk-taking by senior managers in order to increase their chance of promotion to the rank of CEO. Measuring tournament incentives as the pay gap between the CEO and the next layer of senior managers, we find a significantly positive relation between firm risk and tournament incentives. Further, we find that greater tournament incentives lead to higher R&D intensity, firm focus, and leverage, but lower capital expenditures intensity. Our results support the hypothesis that option-like features of intra-organizational CEO promotion tournaments provide incentives to senior executives to increase firm risk by following riskier policies. Finally, the compensation levels and structures of executives of financial institutions have received a great deal of scrutiny after the financial crisis. In a separate examination of financial firms, we again find a significantly positive relation between firm risk and tournament incentives.
AB - This paper tests the proposition that higher tournament incentives will result in greater risk-taking by senior managers in order to increase their chance of promotion to the rank of CEO. Measuring tournament incentives as the pay gap between the CEO and the next layer of senior managers, we find a significantly positive relation between firm risk and tournament incentives. Further, we find that greater tournament incentives lead to higher R&D intensity, firm focus, and leverage, but lower capital expenditures intensity. Our results support the hypothesis that option-like features of intra-organizational CEO promotion tournaments provide incentives to senior executives to increase firm risk by following riskier policies. Finally, the compensation levels and structures of executives of financial institutions have received a great deal of scrutiny after the financial crisis. In a separate examination of financial firms, we again find a significantly positive relation between firm risk and tournament incentives.
KW - Corporate policies
KW - Firm risk
KW - Tournament incentives
UR - https://www.scopus.com/pages/publications/83955162242
UR - https://www.scopus.com/pages/publications/83955162242#tab=citedBy
U2 - 10.1016/j.jfineco.2011.09.005
DO - 10.1016/j.jfineco.2011.09.005
M3 - Article
AN - SCOPUS:83955162242
SN - 0304-405X
VL - 103
SP - 350
EP - 376
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 2
ER -