The literature highlights the role of individuals in firm innovation search, yet our understanding of what shapes those activities at the top executive level remains limited. Based on the tournament literature, we argue that CEO’s firm and industry tournament incentives affect firm search behavior in different ways. Specifically, a firm with a larger pay gap between CEO’s compensation and that of other top executives (i.e., stronger firm tournament incentives) performs a deeper but less broad search. In contrast, a firm with a larger pay gap between its CEO and the highest-paid CEO in the same industry (i.e., stronger industry tournament incentives) performs a broader but less deep search. Further, we argue that the existence of an heir apparent weakens the effects of firm tournament incentive but strengthens the effects of tournament incentive on firm search. Based on a longitudinal dataset of US publicly listed firms from 1992 to 2014, we find evidence consistent with our predictions. Our study contributes to the literature by introducing CEO and top executives’ incentives to the individual-level, incentive-based explanation on firm innovation search and differentiating the effects of firm and industry tournament incentives.
