Tournament Incentives and Stock Price Crash Risk

SYNOPSIS: Using a large sample of U.S. public firms, I provide robust evidence that promotion-based tournament incentives, which are measured as the pay gaps between the CEO and other senior executives, are significantly and positively related to the firm's future stock price crash risk. The documented relationship is robust to controlling for corporate governance quality, and is attenuated for firms with a recent CEO turnover and for firms with more effective external monitoring. In contrast, the relationship is accentuated for firms that experience consecutive under-performance and for firms with greater opacity. Findings of this paper advance our understanding of the benefits and downsides of promotion incentives for non-CEO executives, and highlight the implications of inter-executive incentive scheme design for firm-specific stock price crash risk.