Essays on the determinant and consequence of tournament incentives : evidence from China : a thesis presented in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Accountancy at Massey University, Auckland, New Zealand
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Date
2020
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Massey University
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Abstract
This research investigates the determinant and consequence of tournament incentives using data of publicly listed Chinese firms. Understanding the role of the tournament incentive and its implications is crucial, since it affects firms’ profitability and, consequently, shareholders’ wealth. Furthermore, whether tournament incentives function as an effective governance tools has remained under-explored in emerging markets. Our study sheds new light on the use of tournament incentives in the Chinese market. This study is organized into three essays: (i) a survey of the existing literature on tournament incentives in the accounting and finance area; (ii) the relation between business strategy and tournament incentives; and, finally, (iii) the effect of tournament incentives on stock price crash risk.
Essay One synthesizes the theoretical underpinnings of tournament models, reviews the extant empirical literature on the determinants and consequences of tournament incentives, critiques the findings, and offers suggestions for future research. We synthesize findings from 63 empirical papers and find that several firm-level fundamental and corporate governance variables affect the structure of corporate tournaments. Our review of the consequences of tournament structure reveals that tournaments affect financial reporting and auditing as well as firm-level operational and capital market-based outcomes. This review reveals that the existing accounting and finance literature lacks a strong justification for why one theory, rather than another, is favoured. Moreover, based on potential problems that may exist in empirical models, this review also offers some methodological implications for empirical tournament studies.
In Essay Two, we investigate the association between business strategy and firm-level tournament incentives in China, and find that business strategy is positively associated with firm-level tournament incentives, as proxied by pay differences among senior executives. We further explore the association between tournament incentives and future firm performance, conditional on various business strategies. We find some evidence that the larger tournament incentives offered by firms following innovative strategies are associated with better operating performance. We also find that the positive relationship between business strategy and tournament incentives is manifested only for local, but not central, state-owned enterprises (SOEs). However, no differential evidence is found using firm performance analysis. Our study fills a gap in the existing tournament literature by incorporating business strategy as a critical determinant of the tournament incentives in the more cash-compensation setting of China.
Finally, in Essay Three, we investigate the association between tournament incentives and firms’ stock price crash risk in China. We explore the Chinese setting, where a cash-based compensation system is the primary compensation scheme, as opposed to the equity-based incentive schemes commonly found in the U.S. We provide robust evidence that promotion-based tournament incentives, proxied by compensation differences among top executives, are negatively and significantly associated with firms’ stock price crash risk. We also find that conditional conservatism mediates the negative association between tournament incentives and price crash. Finally, we find that the negative relationship between tournament incentives and price crash is significant for the non-state-owned enterprises only. The findings advance our understanding regarding the corporate governance role of tournament incentives in protecting shareholders’ wealth, since the occurrence of stock price crash risk destroys shareholder value.
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Keywords
Executives, Salaries, etc., Incentives in industry, Organizational effectiveness, Stocks, Prices, China