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Tournament incentives and corporate fraud

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  • Haß, Lars Helge
  • Müller, Maximilian A.
  • Vergauwe, Skrålan

Abstract

This paper identifies a new incentive for managers to engage in corporate fraud stemming from the relative performance evaluation feature of CEO promotion tournaments. We document higher propensities to engage in fraud for firms with strong tournament incentives (as proxied for by the CEO pay gap). We posit that the relative performance evaluation feature of CEO promotion tournaments creates incentives to manipulate performance, while the option-like character can motivate managers to engage in risky activities. We thereby extend previous corporate fraud literature that focuses mainly on equity-based incentives and reports mixed findings. Our results are robust to using different fraud samples, and controlling for other known determinants of fraud as well as manager skills.

Suggested Citation

  • Haß, Lars Helge & Müller, Maximilian A. & Vergauwe, Skrålan, 2015. "Tournament incentives and corporate fraud," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 251-267.
    • Handle: RePEc:eee:corfin:v:34:y:2015:i:c:p:251-267
    DOI: 10.1016/j.jcorpfin.2015.07.008
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    More about this item

    Keywords

    Corporate fraud; Tournament incentives; CEO pay gap;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M53 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Training

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