Product Market Competition, Managerial Incentives, and Firm Valuation

Beiner, Stefan; Schmid, Markus; Wanzenried, Gabrielle (July 2004). Product Market Competition, Managerial Incentives, and Firm Valuation (Discussion Papers 04-12). Bern: Department of Economics

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Our paper is a further contribution to the still 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 principalagent relationship, we investigate the relationships between product market competition, incentive schemes and firm valuation in a multivariate OLS framework. To take into account a possible endogeneity of the incentives provided to managers and Tobin’s Q, our measure of firm value, we additionally employ a simultaneous equations framework. The sample comprises 156 Swiss firms for the year 2002, and the compensation data refer to the firms’ top management and the board of directors in total. Our results suggest that more intensive product market
competition is associated with stronger incentive schemes for managers and a lower firm value.

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