The Effect of Local Tournament Incentives on Firms' Performance, Risk-Taking Decisions, and Financial Reporting Decisions
Ma, Matthew, Pan, Jing, Stubben, Stephen R.
The Accounting Review · 2020 · Volume 95 · Issue 2
Abstract
This study documents the existence of local employment preferences for corporate executives and examines how the compensation of executives' local peers affects their own performance, risk-taking decisions, and financial reporting decisions. We find that external hires of new CEOs (CFOs) are five (eight) times more likely to be from local firms than non-local firms. We also find that local tournament incentives—as proxied by the pay gap between an executive and higher-paid executives in the area—are associated with stronger performance, greater risk taking, and more financial misreporting. We find consistent results using a difference-in-differences analysis that exploits plausibly exogenous variation in local tournament incentives caused by the sudden death of a local CEO. Our findings are consistent with executives taking actions to compete for a promotion to a nearby firm with higher pay.
Keywords
executive compensation, geographic preferences, tournament incentives
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