Industry tournament incentives and corporate innovation

Our paper examines the relationship between industry tournament incentives for CEOs and corporate innovation. We find that the external pay gap is positively associated with subsequent innovation output and its economic value. Our results are robust to using different industry classifications, alternative measures of industry tournament incentives and innovation, and various controls for corporate governance, business strategy, and CEO attributes. We employ a quasi-natural experiment and an instrumental-variable approach to mitigate endogeneity concerns. We also find evidence of a positive and significant relationship between industry tournament incentives and idiosyncratic risk. Overall, the evidence is consistent with our contention that aspirant CEOs undertake innovation projects which can generate uncertain but potentially rewarding outcomes that increase the likelihood of the aspirant standing out and winning the tournament or extracting the tournament-induced benefits internally.