The Costs and Benefits of Long-Term CEO Contracts
London School of Economics & Political Science (LSE)
This paper uses a new data set of 3,954 US CEO employment agreements to study their contractual time horizon. Longer contracts offer protection against dismissals: turnover probability increases by 12% 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 with a longer contractual horizon receive more salary increases. Overall, firm value does not differ across contract types.
Number of Pages in PDF File: 40
Keywords: Underinvestment, investment horizon, CEO contracts, mergers and acquisitions, CEO turnover
JEL Classification: G32, G34, J41, J63
Date posted: January 26, 2012 ; Last revised: October 15, 2013