Positive externalities of CEO delta

Increases in delta incentives are dramatic for a small group of firms (leader firms) but negligible for the majority. We show that leader firms have larger market capitalization and higher irreversibility, and are in industries with negative shocks. When leader firms experience substantial growth in delta incentives, industry peers experience positive abnormal returns and abnormal improvement in fundamentals despite no significant change in delta. Further, we provide evidence that abnormal returns are induced by peer CEOs’ extra efforts in response to the increasing competitive pressure caused by leader firms. To mitigate their competitive pressure and turnover threat, peer CEOs allocate their extra efforts to firms’ operating efficiency and product differentiation.