In this article we examine how the tournament-like progression in the CEO labor market influences corporate innovation strategies. By exploiting a text-based proxy for product innovation based on product descriptions from 10-Ks, we find a positive and significant relation between industry tournament incentives (ITIs) and product innovation. We then explore the trade-off effects of ITIs on product innovation created through long-term patenting technologies and short-term product development. We discover that ITIs strengthen short-term innovation but decrease patent-based innovation. Further analyses show that the effect of ITIs on product innovation is stronger when the product market is more competitive and when CEO characteristics indicate a higher probability of winning the tournament prize.
This paper examines how a tournament among CEOs to progress within the CEO labor market influences their corporate hedging policies. We employ a textual analysis of 10-Ks to generate corporate hedging proxies, finding that the likelihood and intensity of hedging grow as the CEO labor market tournament prizes increase. We also explore the mitigating impact of corporate hedging on the adverse effects of risk-inducing industry tournament incentives (ITIs) on the cost of debt and stock price crash risk, noting that these could be possible reasons behind the relation. Additionally, we observe that the relationship between ITIs and corporate hedging is less pronounced for firms that demonstrate more financial distress and for firms whose CEOs are the founders of the company or are of retirement age. We identify a causal relation between ITIs and corporate hedging using an instrumental variable approach and an exogenous shock sourced from changes in the enforceability of noncompetition agreements across states.
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