Local Tournament Incentives, Firm Performance, and Firm Risk

Abstract

I study the effect of local tournament incentives for CEOs on firm performance and firm risk. I document that local tournament incentives positively affect both firm performance and risk taking. My empirical tests use staggered state-level variation in both non-compete enforceability and the inevitable disclosure doctrine (IDD) to identify shocks to local labor mobility, thereby exogenously affecting the probability of a CEO winning a local tournament. The effect is stronger among firms that are ex ante more likely to be affected by local tournaments. Further, firms spend less on R&D expenditures, reduce earnings management, and have a lower cost of equity capital following an exogenous decrease in tournament incentives. My results are robust to various controls and alternative measures of local tournament incentives. Overall, the findings support the hypothesis that rank-order tournaments affect local executive labor markets.