Power of Tournament Incentives: Evidence from Japanese Corporate Boards

Abstract

We find robust evidence that Japanese firms with many inside directors younger than the top manager (junior directors) frequently replace managers. The proportion of junior directors over non-top manager directors is positively associated with firm performance. Given that most Japanese top managers are promoted within the firm from employee/director positions, those results suggest that firms with many junior directors conduct frequent turnovers to provide tournament incentives to young directors and fierce competition among them create value. We do not find evidence that outside directors strengthen the sensitivity of forced turnovers to firm performance. Also, there is no robust evidence that junior directors weaken the sensitivity.