Tournaments and Managerial Incentives in China's Listed Firms: New Evidence

24 Pages Posted: 6 Oct 2008

See all articles by Takao Kato

Takao Kato

Colgate University - Economics Department; IZA Institute of Labor Economics

Cheryl Long

Colgate University - Economics Department

Abstract

The promotion tournament as a potentially important incentive mechanism for top management in transition economies has not been examined by the emerging literature on managerial incentives in transition economies. This paper is the first attempt to fill this important gap in the literature. The paper begins with modifying the previously-derived empirical predictions 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 expanding 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 performance measure used to decide on 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 enhanced managerial effort and hence improved firm performance, 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.

Keywords: tournaments, managerial incentives, ownership structure, China, transition economies

JEL Classification: M51, P3

Suggested Citation

Kato, Takao and Long, Cheryl Xiaoning, Tournaments and Managerial Incentives in China's Listed Firms: New Evidence. IZA Discussion Paper No. 3730, Available at SSRN: https://ssrn.com/abstract=1278931 or http://dx.doi.org/10.2139/ssrn.1278931

Takao Kato (Contact Author)

Colgate University - Economics Department ( email )

13 Oak Drive
Hamilton, NY 13346
United States
315-228-7562 (Phone)
315-228-7033 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Cheryl Xiaoning Long

Colgate University - Economics Department ( email )

13 Oak Drive
Hamilton, NY 13346
United States

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