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
Date Written: October 10, 2017
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
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