Abstract
This paper examines the impact of CEO external labor market incentives, proxied by CEO industry tournament incentives (CITI), on a firm’s labor investment efficiency (LIE). We develop two competing hypotheses based on the bright side of CITI and the dark side of CITI. Consistent with the former, we find a positive association between CITI and LIE. In cross-sectional tests, we show that the relationship between CITI and LIE is more pronounced for firms with weaker monitoring. Furthermore, this relationship is amplified for firms with weaker financial standing. Our results survive an array of tests for robustness and endogeneity concerns.
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