CEO Short-term Incentives and Corporate Policies

28 February 2019
Versione stampabile

Venue: Economics and Management Building, via Inama 5 (Trento) - Seminar Room 
Time: 2 PM

Speaker:

Abstract:
We exploit exogenous reductions in a CEO’s career horizon, triggered by the CEO’s diagnosis of a serious illness or an illness or death of a close relative, to study the effects of short-termism on corporate policies. We show that CEOs subject to a personal shock become more short-term oriented. There is a reduction in both R&D and CAPEX, and an increase in cash distributions to shareholders following the shock. Our setting reveals that short-termism is not necessarily detrimental to shareholders, as both operating and stock performance increase in the aftermath of the shock. Earnings management, CEO compensation, and the likelihood of being acquired remain unchanged, indicating that the improved performance comes from the implementation of relatively more efficient firm policies rather than from opportunistic behavior.
JEL classification: G32, G34

Keywords: CEO, short-termism, tenure, illness, opportunism, investment, R&D, payout.

The paper is co-authored with Nihat Aktas (WHU Otto Beisheim School of Management), Audra Boone (Texas Christian University) and Ettore Croci (Unicatt).