Tournament incentives and stock price crash risk: Evidence from China

Abstract

In this study, we investigate the association between tournament incentives and firms' stock price crash risk in China. Incentives for promotion towards the highest level in the corporate hierarchy are important to potential candidates; as such promotion often comes with various desirable privileges. We explore the Chinese setting, where a cash-based compensation system is the primary compensation scheme, as opposed to the equity-based incentive schemes commonly found in the US. We provide robust evidence that promotion-based tournament incentives, proxied by compensation differences among top executives, are associated with firms' stock price crash risk negatively and significantly. We also find that conditional conservatism mediates the negative association between tournament incentives and price crash. Finally, we find that the negative relationship between tournament incentives and price crash is significant for the non-state-owned enterprises only. The findings advance our understanding regarding the corporate governance role of tournament incentives in protecting shareholders' wealth, since the occurrence of stock price crash risk destroys shareholder value.