Tournament Incentive,Firm Risk,and Coporate Policies

The tournament, which is a typical phenomenon of the society, politics and economy,plays a very important role in motivating and allocation of the resources. The separation ofownership and control in modern enterprises leads to the principal-agent problem. Therefore,both not only the asymmetry of information between the principals (shareholders) and agents(managers) but also agency problem caused by inconsistency of objective function andagency cost have been vital to the enterprise’s long-term development and survival.Entrepreneurs and academics also have been designing a variety of incentive measures in theterm of management. The salary system in which different ranks are linked to the differentsalaries carried among the administration layer. Companies in which the stock incentivesystem are not mature, salary gap is considered to be one of the feasible access to theprincipal-agent problem. How to set the salary gap between top managements in listingCorporation has become a common concerned problem.With the continuous growth and development of China’s stock market, there are manyscholars who have been studying the relationship between the salary gap of Chinese listingcorporations’ executives and their performances from the perspective of tournament theory,and confirm that the salary gap definitely has impact on the executives’ performance at thecorporations according to the empirical analysis. The salary gap has positive effect on thecompany’s performance. However, performance and benefits are often accompanied withrisks. Considering the growth dimensions of achievement, we also have to consider the riskovershadowed by the achievements at the same time. Paying highly attention to these risksseems to be more important while the economic condition are deteriorating. Along with theincreasing of salary gap, company executives are more likely to take more aggressive policiesto improve their own performance in order to get promotions and bonus, which may posegreat risk to the company. This paper will mainly focus on the listing Corporation’stournament incentives, enterprise risk and company policy. In the term of firm risk andcompany policy, it also provides reference for the listing Corporation executives’compensation.This paper selects the2006-2011Shanghai and Shenzhen two cities listining Corporationdata as the sample, studying the relationship between tournament incentives, enterprise risk and policy. The study result shows that tournament incentives and enterprise risk not onlyhave positive correlation with R&D strength, but also have negative correlation with capitalexpenditure strength. During the process of designing the salary of listing Corporation,performance dimension and risk dimension should be taken into account as a whole since it iscrucial to make a comprehensive decision to determine a reasonable salary gap.