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Tournament incentives, corporate overinvestment, and economic consequences

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  • Choi, Heeick
  • Karim, Khondkar
  • Liu, Yin

Abstract

This study examines the effect of promotion-based tournament incentives on firms' propensity to overinvest and its economic consequences. We find that tournament incentives are positively associated with corporate overinvestment. Furthermore, we show that the relation between tournament incentives and overinvestment has a positive effect on top executives' internal promotion but a negative effect on future firm performance. Our results are robust to an alternative measure of overinvestment, two-stage instrumental variable analyses, and change specification tests. Overall, we suggest that promotion-based tournament incentives increase corporate overinvestment, resulting in a high chance of CEO promotion at the expense of future performance.

Suggested Citation

  • Choi, Heeick & Karim, Khondkar & Liu, Yin, 2025. "Tournament incentives, corporate overinvestment, and economic consequences," International Review of Financial Analysis, Elsevier, vol. 102(C).
    • Handle: RePEc:eee:finana:v:102:y:2025:i:c:s1057521925001772
    DOI: 10.1016/j.irfa.2025.104090
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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