Industry tournament incentives and corporate innovation strategies

Abstract

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.

Industry tournament incentives and corporate hedging policies

“…Initiated by Lazear and Rosen (1981), promotion‐based tournament theory suggests that if it is costly to monitor and measure the efforts and outputs of employees, compensating them based on their positions in the firm can be an optimal compensation scheme inducing them to expend a greater effort. Compensating high‐level employees based on their ordinal ranks promotes competition among them; this may influence their policy choices, including how they deal with riskier firm activities (Coles et al., 2017; Goel & Thakor, 2008; Hvide, 2002; Kini & Williams, 2012), the acquisition policies (Nguyen and Phan, 2015), the aggressiveness of their approach to taxes (Kubick & Lockhart, 2016), their innovation strategies (Kong et al., 2019; Shen and Zhang, 2018), and their incrementation of cash holdings (Huang et al., 2019).…”

“…Other studies note that ITIs increase the level and marginal value of cash holdings(Huang et al, 2019), influence corporate innovation strategies(Kong et al, 2019), and motivate tax aggressiveness(Kubick & Lockhart, 2016).3 Firm performance is considered by outsiders to be one of the major indicators of CEO capability(Fee & Hadlock, 2003).4 The compensation of the second-highest-paid CEO, instead of that of the highest-paid CEO, is used in the literature to mitigate the outlier effect.…”