Tournament Incentives and IPO Failure Risk

Gonul Colak, Dimitrios Gounopoulos *, Panagiotis Loukopoulos , Georgios Loukopoulos

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

This study tests the proposition that higher tournament incentives play a major role in lowering the failure risk of Initial Public Offerings (IPOs). Measuring tournament incentives as the pay gap between the CEO and its subordinate executives, we find that an interquartile change in the distribution of the CEO pay gap translates into a decline in failure risk probability by approximately 27%. The results are driven by the long-term rather than the short-term component of executive pay. Our results hold in an instrumental-variable setting that exploits exogenous variation in the likelihood of employing intra-firm, tournament-based, promotion incentives. Cross-sectional tests indicate that the negative link between tournament incentives and IPO failure is more pronounced when internal promotion contests are more likely to occur. Finally, we document that CEO pay gap is associated with superior long-run operating performance and greater investment efficiency.
Original languageEnglish
Article number106193
Peer-reviewed scientific journalJournal of Banking & Finance
Volume130
ISSN0378-4266
DOIs
Publication statusPublished - 01.09.2021
MoE publication typeA1 Journal article - refereed

Keywords

  • 512 Business and Management
  • CEO pay gap
  • tournamanet incentives
  • initial public offerings
  • IPO survival

Sustainable Development Goals

  • GOAL 08: Decent Work and Economic Growth
  • GOAL 09: Industry, Innovation and Infrastructure

Areas of Strength and Areas of High Potential (AoS and AoHP)

  • AoS: Financial management, accounting, and governance

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