CEO Decision Horizon and Firm Performance: An Empirical Investigation

Abstract

We investigate the effect of top managers' myopia on firms' market valuation. We devise a measure of expected CEO tenure as a proxy of the length of CEO decision horizon. After accounting for the endogenous nature of CEO horizon, our empirical tests show that it is significantly associated with agency costs and provide strong support for the hypotheses that the length of CEO decision horizon has a positive influence on firm value and a negative effect on information risk. The results are consistent with the notion that a short CEO decision horizon is indicative of preference for investments that offer relatively faster paybacks at the expense of long-term value creation.

Keywords: CEO decision horizon, Firm performance, Information risk, Agency costs

JEL Classification: G14, G34, D82