Tournament incentives, corporate overinvestment, and economic consequences

Heeick Choi, Khondkar Karim and Yin Liu

International Review of Financial Analysis, 2025, vol. 102, issue C

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.

Keywords: Tournament incentives; Corporate overinvestment; Internal promotion; Future performance (search for similar items in EconPapers)
JEL-codes: G30 G32 G34 M41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:102:y:2025:i:c:s1057521925001772

DOI: 10.1016/j.irfa.2025.104090

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