The CEO Horizon Problem and Managerial Slack in China

Forthcoming: Management and Organization Review

48 Pages Posted: 18 Nov 2013 Last revised: 8 Dec 2017

See all articles by Junxiong Fang

Junxiong Fang

Fudan University - School of Management

Lerong He

State University of New York (SUNY) College at Brockport

Martin J. Conyon

Lancaster University - Management School; Wharton School, Center for Human Resources

Date Written: October 10, 2017

Abstract

This study investigates how CEO behavior and incentives change during the CEO’s final years in office, known as the horizon problem. We examine how the horizon problem alters managerial slack, a measure of operational inefficiency and managerial value diversion. Using data on Chinese publicly traded firms between 2003 and 2011, we find that managerial slack increases in the last two years of CEO tenure compared to earlier years. In addition, we find that the increase in managerial slack in CEO final years in office is smaller in privately controlled firms than in state-owned enterprises, smaller in firms with CEO equity ownership and more independent boards compared to those without. We conclude that higher quality corporate governance mechanisms ameliorate the perverse incentives associated with the CEO horizon problem, and reduce CEOs’ tendency to increase managerial slack during their final years in office.

Keywords: Horizon effect; Corporate Governance; China

JEL Classification: G3

Suggested Citation

Fang, Junxiong and He, Lerong and Conyon, Martin J., The CEO Horizon Problem and Managerial Slack in China (October 10, 2017). Forthcoming: Management and Organization Review. Available at SSRN: https://ssrn.com/abstract=2355744 or http://dx.doi.org/10.2139/ssrn.2355744

Junxiong Fang

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Lerong He

State University of New York (SUNY) College at Brockport ( email )

Brockport, NY 14420
United States

Martin J. Conyon (Contact Author)

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Wharton School, Center for Human Resources ( email )

3600 Locust Walk
Philadelphia, PA 19104-6365
United States

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