CEO Investment Cycles
University of Utah - Department of Finance
Tracy Yue Wang
University of Minnesota - Twin Cities - Carlson School of Management
Michael S. Weisbach
Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)
October 15, 2014
Charles A. Dice Center Working Paper No. 2013-12
Fisher College of Business Working Paper No. 2013-03-12
This paper documents the existence of a CEO Investment Cycle, in which disinvestment decreases over CEO tenure while investment increases, leading to “cyclical” firm growth in assets as well as in employment. The CEO investment cycle is present for both firings and non-performance related CEO turnovers. Its magnitude is substantial: the estimated difference in investment rate between the first three years of a CEO’s tenure and subsequent years is of the same order of magnitude as the differences caused by business cycles or financial constraints. This investment cycle appears to be best explained by agency-based arguments in which a CEO’s preference for investment growth leads to increasing investment quantity and decreasing investment quality over time as the CEO gains more control over his board. The poor investment decisions tend to be reversed only after the CEO steps down and the new CEO takes over. There is no evidence that the investment cycles occur because of shifting CEO skills or productivity shocks occurring at the time of CEO turnover.
Number of Pages in PDF File: 65
Keywords: Investment, disinvestment, non-performance motivated CEO turnover, CEO control of the board, overinvestment.
JEL Classification: G32, G34, M12, M51working papers series
Date posted: August 16, 2013 ; Last revised: October 16, 2014
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