Tournament incentives, firm risk, and corporate policies

Omesh Kini, Ryan Williams

Research output: Contribution to journalArticle

92 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)350-376
Number of pages27
JournalJournal of Financial Economics
Volume103
Issue number2
DOIs
StatePublished - Feb 1 2012
Externally publishedYes

Keywords

  • Corporate policies
  • Firm risk
  • Tournament incentives

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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