Different effects of internal and external tournament incentives on corporate financial misconduct: Evidence from China

• This study explained how tournament incentives have different effects on financial misconduct. • Internal tournament incentives inhibit corporate financial misconduct. • Firm size strengthens the aforementioned positive association. • External tournament incentives induce corporate financial misconduct. • Firm diversification weakens the aforementioned negative association. Using tournament theory and agency theory, our research analyzes the different effects of internal and external tournament incentives on corporate financial misconduct and the moderating effects of organizational complexity (e.g., firm size and firm diversification) on these relationships. Based on the data of Chinese listed companies for 2008 to 2018, our results show that internal tournament incentives inhibit corporate financial misconduct, while external tournament incentives induce financial misconduct. Furthermore, firm size strengthens the positive impacts of external tournament incentives on financial misconduct, whereas firm diversification weakens the negative impacts of internal tournament incentives on financial misconduct. Our results are of interest to scholars of financial misconduct and tournament theory.