CEO Contractual Protection and Managerial Short-Termism

67 Pages Posted: 6 Sep 2012 Last revised: 19 Jul 2014

See all articles by Xia Chen

Xia Chen

Singapore Management University

Qiang Cheng

Singapore Management University

Alvis K. Lo

Boston College

Xin Wang

The University of Hong Kong

Multiple version iconThere are 2 versions of this paper

Date Written: March 5, 2014

Abstract

How to address managerial short-termism has been an important issue for companies, regulators, and researchers. In this paper we examine the impact of CEO contractual protection, in the form of employment agreements and severance pay agreements, on managerial short-termism. We find that firms with CEO contractual protection are less likely to cut R&D expenditures to avoid earnings decreases and are less likely to engage in real earnings management. The effect of CEO contractual protection is both statistically and economically significant. We further find that this effect increases with the duration and monetary strength of CEO contractual protection. The cross-sectional analyses indicate that this effect is stronger for firms in more homogeneous industries and for firms with higher transient institutional ownership, where the protection is particularly important for CEOs, and is stronger when there are weaker alternative monitoring mechanisms.

Keywords: employment agreement, severance pay agreement, managerial short-termism

JEL Classification: G32, M40

Suggested Citation

Chen, Xia and Cheng, Qiang and Lo, Alvis K. and Wang, Xin, CEO Contractual Protection and Managerial Short-Termism (March 5, 2014). Singapore Management University School of Accountancy Research Paper No. 2014-18. Available at SSRN: https://ssrn.com/abstract=2142230 or http://dx.doi.org/10.2139/ssrn.2142230

Xia Chen

Singapore Management University ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

Alvis K. Lo

Boston College ( email )

Carroll School of Management, Fulton 542
140 Commonwealth Ave.
Chestnut Hill, MA 02467
United States
617-552-8674 (Phone)

Xin Wang

The University of Hong Kong ( email )

1215 K.K.Leung Building
Hong Kong
Hong Kong

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