Promotion Tournaments and Capital Rationing

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Promotion Tournaments and Capital Rationing

Author Info

Bing Han
David Hirshleifer
John C. Persons

Additional information is available for the following registered author(s):

David Hirshleifer

Abstract

We analyze capital allocation in a conglomerate where divisional managers with uncertain abilities compete for promotion to CEO. A manager can sometimes gain by unobservably adding variance to divisional performance. Capital rationing can limit this distortion, increase productive efficiency, and allow the owner to make more accurate promotion decisions. Firms for which CEO talent is more important for firm performance are more likely to ration capital. A rationed manager is more likely to be promoted even though all managers are identical ex ante. When the tournament payoff is relatively small, offering an incentive wage can be more efficient than rationing capital; however, when tournament incentives are paramount, rationing is more efficient. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org, Oxford University Press.

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Article provided by Oxford University Press for Society for Financial Studies in its journal The Review of Financial Studies.

Volume (Year): 22 (2009)
Issue (Month): 1 (January)
Pages: 219-255
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Handle: RePEc:oup:rfinst:v:22:y:2009:i:1:p:219-255

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Paper
- Han, Bing & Hirshleifer, David & Persons, John, 2005. "Promotion Tournaments and Capital Rationing," Working Paper Series 2005-20, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
- Han, Bing & Hirshleifer, David & Persons, John, 2007. "Promotion Tournaments and Capital Rationing," MPRA Paper 6496, University Library of Munich, Germany. [Downloadable!]

References listed on IDEAS
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