Industry Tournament Incentives and the Product-Market Benefits of Corporate Liquidity

Abstract

We evaluate the link between chief executive officer (CEO) industry tournament incentives (ITIs) and the product-market benefits of corporate liquidity. We find that ITIs increase the level and marginal value of cash holdings. Furthermore, ITIs strengthen the relation between excess cash and market-share gains, especially for firms that face significant competitive threats. Additionally, for firms with excess cash, higher ITIs lead to increased research and development (R&D) expenses, capital expenditures, and spending on focused acquisitions as well as reduced payouts. Overall, our findings suggest that ITIs increase the value of cash by incentivizing CEOs to deploy cash strategically to capture its product-market benefits.

Industry tournament incentives and audit fees

“…Previous studies confirm that external auditors consider the audit risks associated with entrenchment effect and are more likely to charge higher audit fees (e.g., Fan & Wong, 2005;Ho & Kang, 2013). Huang et al (2019) argue that tournament incentives encourage CEOs to work smarter and more efficiently to get a promotion, which supports the strategic investment hypothesis rather than the empire-building hypothesis. The incentives align the interests of CEOs and shareholders and encourage CEOs to adopt value-enhancing policies, which reduces agency costs.…”

“…compensation. Based on their study, Huang et al (2019) find that industry tournament incentives increase both the level and the marginal value of cash holdings.…”

Tournament incentives and firm credit risk: Evidence from credit default swap referenced firms

“…() find that competition among CEOs to secure the highest paying job in the industry motivates them to pursue risky but value‐enhancing policies. Similarly, Huang, Jain, and Kini () find that CEO tournaments increase the market value of firm liquidity, largely by providing incentives to CEOs to aggressively deploy firm cash holdings to build market share gains. In addition to US markets, the economic effects of managerial tournaments have also been documented for international markets.…”

Industrial Compensation Gap, Family Ownership, and Risk Preferences

“…Therefore, research on internal tournaments is difficult to implement in Indonesia. External tournaments are competitions that occur between directors in industry (Huang et al, 2015). This tournament will motivate participants to get prize of tournament in the form of promotion in a company that provides a better compensation package (Kini and Williams, 2012;Kubick and Masli, 2016).…”

“…Coles, Li, and Wang (2012) argue that showing good performance is the good way for directors to get good compensation packages. Huang et al (2015) stated that a competition exists between directors to fight for the position of directors in companies that have promising compensation packages. Therefore, the directors of the company increase their risk preference to bring better performance (Kini and Williams, 2012;Kubick and Masli, 2016).…”