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Promotion Tournaments and Capital Rationing

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Author Info
Han, Bing
Hirshleifer, David
Persons, John

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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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 6496.

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Date of creation: Oct 2007
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Handle: RePEc:pra:mprapa:6496

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Find related papers by JEL classification:
G39 - Financial Economics - - Corporate Finance and Governance - - - Other
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
G30 - Financial Economics - - Corporate Finance and Governance - - - General

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