Tournament Incentives and Acquisition Performance

Abstract

This paper examines the impact of promotion-based tournament incentives on corporate acquisition performance. Measuring tournament incentives as the compensation ratio between the CEO and other senior executives, we show that acquirers with greater tournament incentives experience lower announcement returns. Further analysis shows that the negative effect is driven by the risk-seeking behavior of senior executives induced by tournament incentives. Our results are robust to alternative identification strategies. Our evidence highlights that senior executives, in addition to the CEO, play an influential role in acquisition decisions. (JEL G30,

Does firm life cycle have impacts on managerial promotion tournament incentives?

“…They also document a positive association between tournament incentives and R&D intensity, firm focus and leverage. In addition, To et al (2018) show that tournament incentives are associated with negative announcement period returns for the bidding firms, implying that tournament incentives increase the managerial tendency to acquire risky targets. However, Burns et al (2017) are the first to provide international evidence that tournament structure systematically varies with firm and country cultural characteristics, such as firm size, cultural values of power distance, fair income differences and competition.…”

“…Several studies investigate the impact of non-chief executive officer (CEO) executives' promotion tournament incentives for a CEO position on firm performance, corporate policies and risktaking (see Bryan and Mason, 2017;Haß et al, 2015;Kale et al, 2009;Kini and Williams, 2012;Kubick and Masli, 2016;Phan et al, 2017;Shen and Zhang, 2018;To et al, 2018;Zhang et al, 2018). On the contrary, the corporate structure, strategy and decision-making approach differ across different firm life-cycle stages (Adizes, 2004;Miller and Friesen, 1984;Pashley and Philippatos, 1990).…”