Managerial Incentives and Product Market Competition PDF Download

Author: Klaus M. Schmidt
Publisher:
ISBN:
Category : Incentives in industry
Languages : en
Pages : 34

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Author: Giancarlo Spagnolo
Publisher:
ISBN: 9789172585003
Category : Competition
Languages : en
Pages : 170

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Author: Stefan Beiner
Publisher:
ISBN:
Category :
Languages : en
Pages : 53

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This paper contributes to the very small empirical literature on the effects of competition on managerial incentive schemes. Based on a theoretical model that incorporates both strategic interaction between firms and a principal agent relationship, we analyze the relationship between product market competition, incentive schemes and firm valuation. The model predicts a nonlinear relationship between the intensity of product market competition and the strength of managerial incentives. We test the implications of our model empirically based on a unique and hand-collected dataset comprising over 600 observations on 200 Swiss firms over the 2002 to 2005 period. Our results suggest that, consistent with the implications of our model, the relation between product market competition and managerial intensive schemes is convex indicating that above a certain level of intensity in product market competition, the marginal effect of competition on the strength of the incentive schemes increases in the level of competition. Moreover, competition is associated with lower firm values. These results are robust to accounting for a potential endogeneity of managerial incentives and firm value in a simultaneous equations framework.

Author: Zhentang Zhang
Publisher:
ISBN:
Category :
Languages : en
Pages : 20

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Author: Erlend Walter Nier
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ISBN:
Category :
Languages : en
Pages : 330

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Author: Christo Suresh Karunananthan
Publisher:
ISBN:
Category : Compensation management
Languages : en
Pages : 168

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Author: Simi Kedia
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ISBN:
Category :
Languages : en
Pages : 48

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Book Description
This paper examines the effect of competition in the product markets on the design of a firm's governance structure. In oligopolies, profits are not just a function of a firm's own actions but also of the actions taken by rivals. Firms therefore behave strategically and commit to actions which elicit the most favorable responses from rivals. It is shown both theoretically and empirically that firms strategically use incentive features of compensation contracts toalter behavior in product markets. When a firm's output market decisions are strategic substitutes (i.e., marginal profits decrease with an increase in the rival's actions) managerial incentives are decreased, while if these decisions are strategic complements (i.e., marginal profits increase with an increase in the rival's actions) managerial incentives are increased. I develop an empirical measure which captures the sensitivity of a firm's marginal profits to changes in its rival's actions. An examination of CEO incentives in the data shows that when decisions are strategic substitutes, CEOs get awarded stock options with lower pay-for-performance incentives, own a smaller percentage of the firm and have a smaller threat of dismissal following bad performance of the firm. On the other hand, when decisions are strategic complements CEOs get higher pay-for-performance incentives from both cash and stock based compensation.

Author: Ismo Linnosmaa
Publisher:
ISBN: 9789517819312
Category : Competition
Languages : en
Pages : 198

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Tiivistelmä: Tuotemarkkinoiden kilpailu ja yritysjohdon kannustinjärjestelmät epätäydellisen kilpailun yrityksissä.

Author: Michael Raith
Publisher:
ISBN:
Category :
Languages : en
Pages :

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This paper examines how the degree of competition among firms in an industry affects the incentives that firms provide to their managers. A central assumption is that there is free entry and exit in the industry, which implies that changes in the nature of competition lead to changes in the equilibrium market structure. I show that with greater product market competition as a result of greater product substitutability or a larger market, principals unambiguously provide stronger incentives to their agents to reduce costs. At the same time, more intense competition also leads to more volatile firm-level profits. Consequently, managers' incentives are positively correlated with firm-level risk, consistent with empirical evidence. A decrease in the cost of entering the market has the opposite effect on incentives, but still induces a positive correlation between risk and incentives.

Author: Fabio Feriozzi
Publisher:
ISBN:
Category :
Languages : en
Pages :

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This paper studies the effect of increased competition in the product market on managerial incentives. I propose a simple model of career concerns where firms are willing to pay for managerial talent to reduce production costs, but also to subtract talented CEOs from competitors. This second effect is privately valuable to firms, but is socially wasteful. As a result, equilibrium pay for talent can be inefficiently high and career concerns too strong. Explicit incentive contracts do not solve the problem, but equilibrium pay is reduced if managerial skills have firm-specific components, or if firms are heterogeneous. In this second case, managers are efficiently assigned to firms, but equilibrium pay reflects the profitability of talent outside the efficient allocation. The effect of increased competition is ambiguous in general, and depends on the profit sensitivity to cost reductions. This ambiguity is illustrated in two examples of commonly used models of imperfect competition.