Motivated by Coles, Li, and Wang (2020)’s prediction that industry tournament incentives are linked to heightened risk-seeking behavior, we examine whether these incentives contribute positively to systemic risk. Using a measure of systemic risk that captures the cross-sectional tail dependency between the US financial system and individual financial institutions, we find that the external pay gap is positively related to an institution’s contribution to systemic risk. Consistent with our expectation, industry tournament incentives are positively associated with individual financial institutions’ stock return volatility, Value at Risk, and crash risk, thus indirectly contributing to systemic risk due to financial institutions’ inherent interconnectedness. More interestingly, the external pay gap is positively related to an institution’s financial industry beta and encourages systemically risky activities, suggesting an important impact channel through institutions’ undertaking correlated activities.

China stock market regulators implemented market-wide circuit breakers when the market crash was imminent on the 4th of January 2016. This paper examines whether traders’ herding behaviour led to the circuit breaker trigger and limited success in moderating market reaction. Using intraday data, we show extensive herding in the pre-halt and post-halt periods on the event day. We find herding and excessive market volatility are mutually causative. Importantly, we identify herding stems from both market sentiments and fundamentals around the circuit breaker trigger. In a market dominated by individual investors, non-fundamental herding primarily characterises the Chinese stock market. Nonetheless, the uncertain and disruptive impact of the circuit breaker led to massive and rapid stocks sale underlying the fundamental herding. Investors trade in the direction of the crowd giving rise to self-enforced herding and greater market volatility, and culminating in the circuit breaker trigger.