The Effect of Industry Tournament Incentives on Investment Efficiency and Capital Structure Optimism

The most important decisions affecting the creation of value and wealth in the enterprises are decisions about investment and capital structure. But investing and financing is not appropriate in themselves, and the enterprises need to pay attention to the investment efficiency and the optimality of the capital structure in these decisions. In short, investment efficiency is investing only in projects with a positive net present value and the optimization of the capital structure means minimizing the cost of capital and bankruptcy risk through financing. In general, investment inefficiency and sub optimality of the capital structure are due to information asymmetry and agency problems. The best way to deal with agency problems is to control the motivations of managers. Considering Maslow's hierarchy of needs and the effect of needs on motivation, it can be said that in addition to financial incentives, social incentives are also effective in the behavior of enterprise managers. Therefore, this study seeks to investigate the effect of industry tournament incentives as a measure of social incentives on investment efficiency and capital structure optimization. 

In this study, the natural logarithm of industry compensation gap has been used to measure industry tournament incentives, Biddle et al.'s model has been used to measure investment efficiency, and Synn and Williams's model has been used to evaluate the optimality of capital structure. Also, to test the research hypotheses, the data of 123 companies listed on the Tehran Stock Exchange from 2010 to 2019 were used and the data were analyzed using multiple linear regression. 

The findings of this study showed that the industry tournament incentives have a negative (positive) and significant effect on investment efficiency (inefficiency). However, the industry tournament incentives do not have a significant effect on overinvestment and lowerinvestment in particular. Also, the industry tournament incentives have a positive and significant effect on the optimality of the capital structure and do not have a significant effect on the positive and negative deviation from the optimal capital structure.

The main hypothesis of this study is that high pay and other desirable characteristics of the managers at other companies in the same or related industries will provide incentives to managers at their own companies. In general, the findings of this study indicate the positive effect of industry tournament incentives on improving company performance. Therefore, policymakers and decision-makers about managers' compensations and motivations should pay attention to other incentives in addition to financial incentives. And during determining the manager’s compensation, in addition to the amount of compensation, pay attention to the other manager's compensation in the same industry and the labor market of managers, and create a balance between different types of motivation.