| dc.description.abstract | In this study, we incorporate the concept of “signaling” proposing by Spence (1973) into the conventional tournament theory proposing by Lazear and Rosen (1981) to examine the effect of firms’ emitted signals on their internal pay schemes. We hypothesize that the better the firms’ emitted signals are, the larger the intra-firm compensation gap will be. To test our hypothesis, we employ Taiwanese listed firm data from the food industry, the financial industry, and the semiconductor industry and analyze it using a random-effects model. The empirical results substantially support our hypothesis. In overall industry, firms obtaining higher values in performance-related signaling variables (stock price, stock returns, and EPS) enlarge their compensation gap. In individual industry, firms performing better in business rankings, credit rating, information disclosure and transparency rankings and performance-related signals widen their compensation gap. Nevertheless, such relationship is insignificant for firms in the financial industry. Furthermore, the empirical evidence shows that the large compensation gap, namely a tournament-type incentive, exists not only among top executives but also among lower-rung workers, conforming to the prediction of tournament theory.
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