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Product Market Competition, Managerial Incentives and Firm Valuation
Journal
European Financial Management
ISSN
1354-7798
ISSN-Digital
1468-036X
Type
journal article
Date Issued
2011-03
Author(s)
Abstract
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.
Language
English
Keywords
Product market competition
Strategic interaction
Principal agent relationship
Managerial incentives
Firm valuation
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Wiley-Blackwell
Publisher place
Oxford UK
Volume
17
Number
2
Start page
331
End page
366
Pages
36
Subject(s)
Division(s)
Eprints ID
210171