Tournaments and managerial incentives in China's listed firms: New evidence
The promotion tournament as a potentially important incentive mechanism for top management in transition economies has not been examined by the literature on managerial incentives. This paper attempts to fill this important gap in the literature. The paper begins with modifying the empirical predictions previously-derived 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 a larger 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 the performance measure used to determine 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 improved firm performance due to enhanced managerial effort, 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.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Lucian Arye Bebchuk, 1999. "A Rent-Protection Theory of Corporate Ownership and Control," NBER Working Papers 7203, National Bureau of Economic Research, Inc.
- Dong, Xiao-Yuan & Putterman, Louis, 2003. "Soft budget constraints, social burdens, and labor redundancy in China's state industry," Journal of Comparative Economics, Elsevier, vol. 31(1), pages 110-133, March.
- Martin L. Weitzman, 1976.
"The New Soviet Incentive Model,"
Bell Journal of Economics,
The RAND Corporation, vol. 7(1), pages 251-257, Spring.
- John M. Litwack, 1991. "Legality and Market Reform in Soviet-Type Economies," Journal of Economic Perspectives, American Economic Association, vol. 5(4), pages 77-89, Fall.
- Shleifer, Andrei & Vishny, Robert W, 1997.
" A Survey of Corporate Governance,"
Journal of Finance,
American Finance Association, vol. 52(2), pages 737-83, June.
- Andrei Shleifer & Robert W. Vishny, 1995. "A Survey of Corporate Governance," Harvard Institute of Economic Research Working Papers 1741, Harvard - Institute of Economic Research.
- Andrei Shleifer & Robert W. Vishny, 1996. "A Survey of Corporate Governance," NBER Working Papers 5554, National Bureau of Economic Research, Inc.
- Bonin, John P, 1976. "On the Design of Managerial Incentive Structures in a Decentralized Planning Environment," American Economic Review, American Economic Association, vol. 66(4), pages 682-87, September.
- Schmidt,Klaus & Schnitzer,Monika, 1992.
"Privatization and management incentives in the transition period in Eastern Europe,"
Discussion Paper Serie A
374, University of Bonn, Germany.
- Schmidt Klaus M. & Schnitzer Monika, 1993. "Privatization and Management Incentives in the Transition Period in Eastern Europe," Journal of Comparative Economics, Elsevier, vol. 17(2), pages 264-287, June.
- Schmidt, K.M. & Schnitzer, M., 1992. "Privatization and Management Incentives in the Transition Period in Eastern Europe," Working papers 92-17, Massachusetts Institute of Technology (MIT), Department of Economics.
- Schmidt, Klaus M. & Schnitzer, Monika, 1993. "Privatization and Management Incentives in the Transition Period in Eastern Europe," Munich Reprints in Economics 3400, University of Munich, Department of Economics.
- Schmidt, Klaus M. & Schnitzer, Monika, 1993. "Privatization and Management Incentives in the Transition Period in Eastern Europe," Munich Reprints in Economics 3109, University of Munich, Department of Economics.
- Kato, Takao & Long, Cheryl, 2006. "CEO turnover, firm performance, and enterprise reform in China: Evidence from micro data," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 796-817, December.
- Kornai, Janos, 1992. "The Socialist System: The Political Economy of Communism," OUP Catalogue, Oxford University Press, number 9780198287766.
- Aghion, Philippe & Blanchard, Olivier & Burgess, Robin, 1994. "The behaviour of state firms in eastern Europe, pre-privatisation," European Economic Review, Elsevier, vol. 38(6), pages 1327-1349, June.
- Rick Audas & Tim Barmby & John Treble, 2004. "Luck, Effort, and Reward in an Organizational Hierarchy," Journal of Labor Economics, University of Chicago Press, vol. 22(2), pages 379-396, April.
- Alexander Muravyev, 2003. "Turnover of Senior Managers in Russian Privatised Firms," Comparative Economic Studies, Palgrave Macmillan, vol. 45(2), pages 148-172, June.
- Anup Agrawal & Charles R. Knoeber & Theofanis Tsoulouhas, .
"Are Outsiders Handicapped in CEO Successions?,"
Working Paper Series
003, North Carolina State University, Department of Economics, revised Apr 2004.
- Ronald G. Ehrenberg & Michael L. Bognanno, 1988.
"Do Tournaments Have Incentive Effects?,"
NBER Working Papers
2638, National Bureau of Economic Research, Inc.
- Drago, Robert & Garvey, Gerald T, 1998. "Incentives for Helping on the Job: Theory and Evidence," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 1-25, January.
- Barry W. Ickes & Larry Samuelson, 1987. "Job Transfers and Incentives in Complex Organizations: Thwarting the Ratchet Effect," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 275-286, Summer.
- Eriksson, Tor, 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data," Journal of Labor Economics, University of Chicago Press, vol. 17(2), pages 262-80, April.
- Baker, George & Gibbs, Michael & Holmstrom, Bengt, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 921-55, November.
- Kato, Takao & Kubo, Katsuyuki, 2006. "CEO compensation and firm performance in Japan: Evidence from new panel data on individual CEO pay," Journal of the Japanese and International Economies, Elsevier, vol. 20(1), pages 1-19, March.
- Cindy A. Schipani & Liu Junhai, 2001. "Corporate Governance in China: Then and Now," William Davidson Institute Working Papers Series 407, William Davidson Institute at the University of Michigan.
- Main, Brian G M & O'Reilly, Charles A, III & Wade, James, 1993. "Top Executive Pay: Tournament or Teamwork?," Journal of Labor Economics, University of Chicago Press, vol. 11(4), pages 606-28, October.
- Bai, Chong-En & Liu, Qiao & Lu, Joe & Song, Frank M. & Zhang, Junxi, 2004. "Corporate governance and market valuation in China," Journal of Comparative Economics, Elsevier, vol. 32(4), pages 599-616, December.
- Bognanno, Michael L, 2001. "Corporate Tournaments," Journal of Labor Economics, University of Chicago Press, vol. 19(2), pages 290-315, April.
When requesting a correction, please mention this item's handle: RePEc:eee:chieco:v:22:y:2011:i:1:p:1-10. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If references are entirely missing, you can add them using this form.