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Tournaments and Managerial Incentives in China's Listed Firms: New Evidence

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  • Kato, Takao

    ()
    (Colgate University)

  • Long, Cheryl

    ()
    (Colgate University)

Abstract

The promotion tournament as a potentially important incentive mechanism for top management in transition economies has not been examined by the emerging literature on managerial incentives in transition economies. This paper is the first attempt to fill this important gap in the literature. The paper begins with modifying the previously-derived empirical predictions from the tournament theory to the context of transition economies in which state ownership still plays a significant role in publicly-traded firms. Specifically, we test the following two hypotheses. First, the winner's prize will need to increase in order to prevent each contestant from lowering his/her effort level in the face of expanding contestant pool. Such an optimal response of the winner's prize to the size of the contestant pool is more evident for China's listed firms that are less controlled by the state. Second, the winner's prize will also need to rise in order to prevent each contestant from reducing his/her effort level in the face of greater market volatility (or more noise in performance measure used to decide on the tournament winner). Using comprehensive financial and accounting data on China's listed firms from 1998 to 2002, augmented by unique data on executive compensation and ownership structure, we find evidence in support of both hypotheses. Finally, we also find evidence suggesting that an increase in the winner's prize will result in enhanced managerial effort and hence improved firm performance, and that the performance effect of the winner's prize is greater for China's listed firms that are less controlled by the state. As such this paper provides yet another piece of evidence that ownership restructuring may be needed for China to successfully transform its SOEs to efficient modernized corporations and reform its overall economy.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3730.

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Length: 24 pages
Date of creation: Sep 2008
Date of revision:
Publication status: published in: China Economic Review, 2011, 22 (1), 1-10 (lead article)
Handle: RePEc:iza:izadps:dp3730

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Keywords: transition economies; tournaments; managerial incentives; ownership structure; China;

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References

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Citations

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Cited by:
  1. Johansson, Anders C. & Feng, Xunan, 2013. "CEO Incentives in Chinese State-Controlled Firms," Working Paper Series 2013-27, Stockholm China Economic Research Institute, Stockholm School of Economics.
  2. Chen, Jing & Ezzamel, Mahmoud & Cai, Ziming, 2011. "Managerial power theory, tournament theory, and executive pay in China," Journal of Corporate Finance, Elsevier, Elsevier, vol. 17(4), pages 1176-1199, September.
  3. Hu, Fang & Tan, Weiqiang & Xin, Qingquan & Yang, Sixian, 2013. "How do market forces affect executive compensation in Chinese state-owned enterprises?," China Economic Review, Elsevier, Elsevier, vol. 25(C), pages 78-87.
  4. Lam, Kevin C.K. & McGuinness, Paul B. & Vieito, João Paulo, 2013. "CEO gender, executive compensation and firm performance in Chinese‐listed enterprises," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 21(1), pages 1136-1159.

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