Organizational Slack, CEO Turnover and the Horizon Problem in China
Martin J. Conyon
Lancaster University - Management School; Wharton School, Center for Human Resources
Junxiong Fang Sr.
Fudan University - School of Management
State University of New York (SUNY) College at Brockport; Fuzhou University
March 10, 2016
This study investigates the impact of the horizon effect on organizational slack in China. Using data on Chinese publicly traded firms between 2003 and 2011, we find that organizational slack is significantly higher in the last two years of CEO tenure compared to previous years. In addition, organizational slack in the CEOs terminal years is lower when the board of directors is more independent, when CEO equity ownership is higher, when the firm is privately controlled instead of a state-owned enterprise, and when product market competition is more intense. Our findings indicate that high quality corporate governance mechanisms ameliorate the perverse incentives associated with the horizon problem. We also find that organizational slack during the CEOs final years in office varied by type of CEO turnover. Voluntary turnovers give rise to more organizational slack and rent extraction. We find little evidence that organizational slack is a substitute for executive compensation or has value-enhancing incentive effects. Instead, we show that organizational slack in the CEOs final years in office is associated with significantly lower current and future firm performance.
Number of Pages in PDF File: 58
Keywords: Horizon effect; Corporate Governance; China
JEL Classification: G3
Date posted: November 18, 2013 ; Last revised: March 15, 2016