Abstract
A CEO’s motivation to counteract rivals’ aggression is vital in competitive dynamics, as an inadequate response can harm the firm’s performance. Agency theory suggests that compensation can incentivize CEOs to act in the firm’s best interests. We show that the CEO compensation structure affects how the firm responds to rivals’ aggressiveness. We introduce CEO wealth sensitivity to stock price (delta) and stock return volatility (vega) as differential characteristics of CEO compensation that influence competitive response to rivals’ aggressiveness. Using a panel of S&P 500 firms, we found that the relationship between rivals’ and the consequent focal firm’s competitive aggressiveness is contingent on the CEO’s wealth sensitivity. The study introduces the agency mechanisms to competitive dynamics and CEO wealth sensitivity as a contingency for a firm’s competitive behavior.