CEO career horizon, corporate governance, and real options: The role of economic short‐termism

Abstract

Research Summary: Combining studies on real options theory and economic short‐termism, we propose that, depending on CEOs’ career horizons, CEOs have heterogeneous interests in strategic flexibility, and thus, have different incentives to make real options investments. We argue that compared to CEOs with longer career horizons, CEOs with shorter career horizons will be less inclined to make real options investments because they may not fully reap the rewards during their tenure. In addition, we argue that long‐term incentives and institutional ownership will mitigate the relationship between CEOs’ career horizons and real options investments. U.S. public firms as an empirical setting produced consistent evidence for our predictions. Our study is the first to theoretically explain and empirically show that a CEO's self‐seeking behavior will impact real options investments. Managerial Summary: This article helps to explain how a CEO's self seeking‐behavior may shape a firm's real option investment, which could result in different level of strategic flexibility. We argue that CEOs with short career horizons have less time to exercise their firms’ real options, which should lower the investments in the firms’ real options portfolios relative to CEOs with long career horizons. We study a sample of U.S. public firms and find strong evidence that a CEO's expected tenure in the firm is positively related to the real options investments at the firm level. We find that this agency issue can be mitigated by adopting appropriate corporate governance mechanisms such as long‐term incentives and institutional investors.

When Do CEOs Engage in CSR Activities? Performance Feedback, CEO Ownership, and CSR

“…In our sample, the mean of CEO ownership was 0.02 and the standard deviation 0.05 (see Table 1 below). These values are quite similar to the mean of 0.024 and the standard deviation of 0.055 from a larger-scale study [46], based on 15,970 firm-year observations of 2155 firms from various industries excluding the financial and utilities industries, during the similar 20-year period from 1994 to 2013.…”

Executive Incentives Matter for Corporate Social Responsibility under Earnings Pressure and Institutional Investors Supervision

“…The latter refers to some responsible activities serving the inner stakeholders of enterprises, such as employee relations, product safety, and governance. (The technical CSR is more likely to generate less moral capital, which may embed the interests of the executives into the inner CSR activities [42,43].) Following Mattingly and Berman [9] and Godfrey et al [44], this paper defines INCSRS and INCSRNC as the sum scores of the strengths and concerns items under the institutional CSR category, and TECSRS and TECSRC as the sum scores of the strengths and concerns items under the technical CSR category, respectively.…”

“…Based on the studies of Lee et al, [42] and Cao et al, [45], this paper classifies the executive incentives as the short-term incentives and the long-term incentives. Short-term incentives for executives (SHOEXE) are measured by the natural logarithm of the sum of salary, bonus, and other cash payments of the top three senior executives.…”

CEO’s Childhood Experience of Natural Disaster and CSR Activities

“…CEO career horizon is the expected amount of time left before a CEO retires (Antia et al, 2010 ; Matta & Beamish, 2008 ). Measured by a combination of age and tenure relative to the industry average, advancing age and longer tenure shorten a CEO’s career horizon (Lee et al, 2018 ). CEO age (Huang et al, 2012 ; Serfling, 2014 ) and tenure (Chen et al, 2019 ; Finkelstein & Hambrick, 1990 ) have long been considered to be important demographic variables that affect the way CEOs perceive, process, and interpret information, thus influencing the corporate decisions they make.…”

“…CEOs with relatively longer career horizons have been shown to make risky decisions to prove their abilities and acquire a sound professional reputation (Prendergast & Stole, 1996 ) and engage more in growth and acquisitions (Matta & Beamish, 2008 ; Yim, 2013 ). By contrast, CEOs with shorter career horizons lose interest in making long-term investments such as breakthrough innovations (Cho & Kim, 2017 ; Lee et al, 2018 ; Serfling, 2014 ) to safeguard their reputation built over time and to avoid risking their future financial security (Davidson et al, 2007 ). Instead, they focus on short-term profit-generating initiatives such as sales promotion (Antia et al, 2010 ).…”