Managerial diversion, product market competition, and firm performance

We derive the conditions under which a manager will divert and how managerial diversion affects product market performance and firm profits. Our model predicts that managerial diversion is more likely to occur and leads to more aggressive product market behavior in a firm with weak incentives and co...

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Bibliographic Details
Published inChina economic review Vol. 50; pp. 240 - 264
Main Authors Li, Guangzhong, Li, Jie
Format Journal Article
LanguageEnglish
Published Elsevier Inc 01.08.2018
Subjects
China
Executive compensation
Managerial diversion
Product market behavior
State-owned enterprises
Product market behavior
G30
China
Managerial diversion
Executive compensation
J33
State-owned enterprises
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Summary:We derive the conditions under which a manager will divert and how managerial diversion affects product market performance and firm profits. Our model predicts that managerial diversion is more likely to occur and leads to more aggressive product market behavior in a firm with weak incentives and corporate governance. In these firms, the relation between managerial diversion and firm profits is inverse U-shaped. Chinese state-owned manufacturing firms are used to test our theoretical model, and we find supportive evidence. •We study managerial diversion decision and its impact on product market competition and firm profits à la Cournot.•Managerial diversion is more likely to occur in a firm with weak incentives and corporate governance.•The relation between managerial diversion and firm profits is inverse U-shaped.
ISSN:1043-951X
1873-7781
DOI:10.1016/j.chieco.2018.04.009