The Dark Side of Industry Tournament Incentives

We find that firms whose CEOs face stronger industry tournament incentives, measured by their pay gap relative to the highest industry CEO pay, engage in more earnings manipulations. The evidence is concentrated in cases where CEOs face fewer mobility restrictions, are more likely to participate in the tournament, and are less aligned with shareholder interests. CEOs with stronger industry tournament incentives also disclose positive (negative) news more (less) frequently. Our findings highlight a form of perverse incentives created by industry tournaments and imply that one firm’s executive compensation policy can generate negative externality for other firms’ disclosure practice.. Our findings highlight a form of perverse incentives created by industry tournaments and imply that one firm’s executive compensation policy can generate negative externality for other firms’ disclosure practice.