The Costs and Benefits of Long-Term CEO Contracts

Abstract:     
This paper uses a new data set of 4,619 US CEO employment agreements to study their contractual time horizon. Longer contracts offer protection against dismissals: turnover probability increases by 17% each year closer to expiration. This should encourage CEOs to pursue long-term projects, and CEOs with more contractual time indeed invest more. However, because longer contracts make it harder to dismiss managers, they also impose less discipline. Consistent with this argument, CEOs under a shorter contractual horizon perform better in acquisitions, and CEOs with a longer contractual horizon receive more perquisites. Overall, firm value does not differ across contract types.

Number of Pages in PDF File: 62

Keywords: Underinvestment, investment horizon, CEO contracts, mergers and acquisitions, CEO turnover

JEL Classification: G32, G34, J41, J63

working papers series