Industry Tournament Incentives and Product Innovation

Conservative Boards and Intrepid Managers: The Interplay of Corporate Governance, Managerial Discretion and Financing Behavior Along Two Famous Financial Puzzles

“…The first channel refers to risk-taking driven by the managerial ambition to climb the ladder in the job market with the goal to assume the position of the CEO in the leading firm in their industries. This has been refereed in the literature as "industry tournament incentives" (Coles, Li, & Wang, 2018), a phenomenon that has been associated with higher levels of risk-taking across different studies (Lonare, Nart, & Kong, 2019;Coles et al 2018;Kubick and Lockhart, 2016). The rationale is that the desirable characteristics of being in the CEO position at a higher-ranked company in the same or related industries will provide incentives to CEOs at their own companies.…”

“…Thus, if the CEO can deliver outstanding performance in their own firm, this will signal their superior capacity to the jobmarket, which in turn will increase the chances of climbing upwards in the tournament and therefore attaining higher compensation, enhanced span of control, higher visibility, and status (Coles et al, 2018). In sum, because this tournament provides option-like and convex payoffs, CEOs can be induced to undertake riskier corporate policies aiming to increase their odds of winning (Lonare, Nart, & Kong, 2019;. Finally, research has found that this kind of risk-taking leads to higher cost of debt because the pursuit of more aggressive policies driven by option-like, convex payoffs may be viewed negatively by the financing market, which in turn will demand a premium on their funds making debt more costly (Kubick, Lockhart and Mauer, 2018; see also .…”