The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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The Golden Mean: The Risk‐Mitigating Effect of Combining Tournament Rewards with High‐Powered Incentives
Published: 07/14/2022 | DOI: 10.1111/jofi.13169
DUNHONG JIN, THOMAS NOE
The rewards received by financial managers depend on both relative performance (e.g., fund inflows based on fund rankings, promotions based on peer comparisons) and absolute performance (e.g., bonus payments for meeting accounting targets, hedge‐fund incentive fees). Both relative and absolute performance rewards engender risk‐taking. In this paper, we show that these two sources of risk‐taking, relative and absolute performance rewards, mitigate the risk‐taking incentives produced by the other. This mutual incentive‐reduction effect generates a number of novel predictions about the relationship of managerial risk‐taking with the structure of relative and absolute performance rewards.