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Industry tournament incentives and the US financial systemic risk

Author

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  • Tu Nguyen
  • Sandy Suardi
  • Jing Zhao

Abstract

Motivated by Coles, Li, and Wang (2020)’s prediction that industry tournament incentives are linked to heightened risk-seeking behavior, we examine whether these incentives contribute positively to systemic risk. Using a measure of systemic risk that captures the cross-sectional tail dependency between the US financial system and individual financial institutions, we find that the external pay gap is positively related to an institution’s contribution to systemic risk. Consistent with our expectation, industry tournament incentives are positively associated with individual financial institutions’ stock return volatility, Value at Risk, and crash risk, thus indirectly contributing to systemic risk due to financial institutions’ inherent interconnectedness. More interestingly, the external pay gap is positively related to an institution’s financial industry beta and encourages systemically risky activities, suggesting an important impact channel through institutions’ undertaking correlated activities.

Suggested Citation

  • Tu Nguyen & Sandy Suardi & Jing Zhao, 2025. "Industry tournament incentives and the US financial systemic risk," Review of Finance, European Finance Association, vol. 29(4), pages 1259-1302.
    • Handle: RePEc:oup:revfin:v:29:y:2025:i:4:p:1259-1302.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaf026
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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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