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Industry Tournament Incentives and the Product-Market Benefits of Corporate Liquidity

Published online by Cambridge University Press:  31 August 2018

Jian Huang ,
Bharat A. Jain  and
Omesh Kini
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Abstract

We evaluate the link between chief executive officer (CEO) industry tournament incentives (ITIs) and the product-market benefits of corporate liquidity. We find that ITIs increase the level and marginal value of cash holdings. Furthermore, ITIs strengthen the relation between excess cash and market-share gains, especially for firms that face significant competitive threats. Additionally, for firms with excess cash, higher ITIs lead to increased research and development (R&D) expenses, capital expenditures, and spending on focused acquisitions as well as reduced payouts. Overall, our findings suggest that ITIs increase the value of cash by incentivizing CEOs to deploy cash strategically to capture its product-market benefits.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 2 , April 2019 , pp. 829 - 876
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Vikas Agarwal, Naveen Daniel, E. Han Kim, John McConnell, Gordon Phillips, Amiyatosh Purnanandam, and participants at the 2016 Krannert School of Management Conference to Celebrate John McConnell’s Contributions to Finance for helpful comments. This article was improved significantly because of the comments and suggestions we received from Jarrad Harford (the editor) and William Maxwell (the referee). We thank Ryan Williams and David Yin for their help with the construction of some of our incentive-related variables. The usual disclaimer applies.

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