Local Tournament Incentives and Firm Risk

Using the compensation gap between a CEO and the second-highest-paid CEO in the same Metropolitan Statistical Area (MSA) as a proxy for local tournament incentives, I document a positive relation between local tournament incentives and firm risk. Specifically, CEOs who face higher local incentives implement riskier policies, including higher R&D expenditures and less diversification. Exploiting quasi-shocks to local incentives and cross-sectional variation in the probability of winning, I show that the incentive effects vary systematically with theoretical predictions. The results are robust to alternative local tournament incentives measures, sample periods, and firm risk proxies