Seminar Date: 3 October, 2014 (Friday)

Seminar Time: 10:30 a.m. - 12:00 p.m.

Seminar Venue: Room 405, 4F, Building 1, College of Management

Speaker: Prof. Carl Hsin-Han Shen

Title: Tournament Incentives and Firm Innovation

Abstract:

In this study we analyze how promotion-based tournament incentives for non-CEO senior executives affect firm innovation performance. By measuring tournament incentive as the pay gap between a CEO and the next layer of senior executives, we find evidence that the option-like feature of a promotion tournament provides senior executives with strong incentives to undertake risky innovative projects such as research and development (R&D) investments. More importantly, we find that tournament incentives are positively related to corporate innovative efficiency, as measured by the number of patents and patent citations generated by per million dollars of R&D investment. Our main finding holds in a variety of robustness tests, including the instrumental-variable two-stage regression analysis. Consistent with the argument that tournament incentive is stronger when a succession contest is more likely to occur, we find the positive relation between tournament incentive and innovative efficiency is most pronounced during the period prior to CEO turnovers, especially when the succeeding CEO is promoted from within the firm and when senior managers expect a high probability of CEO replacement. Overall, our findings suggest that tournament incentives enhance corporate innovation performance.