Product Market Competition, Managerial Incentives and Firm Valuation


  • We thank an anonymous referee, John Doukas (the editor), Stefan Duffner, Colin Mayer, Ken Okamura, Pedro Seiler, and participants at the EARIE conference 2005 in Porto for helpful comments and Edith Bernhard, Max Lienhard, Max Schmid, and Andreas Wernli for support with data provision and helpful research assistance. Parts of this research were undertaken while Beiner was at the Saïd Business School at the University of Oxford, Schmid at the Stern School of Business, New York University, and Wanzenried at the Haas School of Business, University of California Berkeley. We acknowledge financial support from the Swiss National Science Foundation (SNF) and the Freiwillige Akademische Gesellschaft (FAG). All errors remain our responsibility.


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 analyse 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 2002–2005 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.