Short-Horizon Incentives and Stock Price Inflation

49 Pages Posted: 4 Dec 2013 Last revised: 22 Jan 2021

See all articles by J. Daniel Chi

J. Daniel Chi

University of Nevada, Las Vegas (UNLV) - Department of Finance

Manu Gupta

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate

Shane A. Johnson

Texas A&M University - Department of Finance

Date Written: June 28, 2019

Abstract

Do managerial incentive horizons have capital market consequences? We find that they do when short-sale constraints are more binding. Firms experience significant stock price inflation when their CEOs have short horizon incentives. The short-horizon CEOs sell more shares at inflated prices and generate greater abnormal trading profits. The stock price inflation is partly explained by greater earnings surprises and more positive investor reaction to the surprises. To inflate stock prices, short-horizon firms are more likely to employ income-increasing discretionary accruals. Consistent with theoretical predictions, all these effects are attenuated or statistically insignificant when short-sale constraints are less binding.

Keywords: executive compensation; incentives; stock returns; insider trading; earnings management

JEL Classification: M52; G14; G34

Suggested Citation

Chi, Jianxin Daniel and Gupta, Manu and Johnson, Shane A., Short-Horizon Incentives and Stock Price Inflation (June 28, 2019). Journal of Corporate Finance, December 2020, Available at SSRN: https://ssrn.com/abstract=2362420 or http://dx.doi.org/10.2139/ssrn.2362420

Jianxin Daniel Chi

University of Nevada, Las Vegas (UNLV) - Department of Finance ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States

HOME PAGE: http://www.unlv.edu/people/jianxin-chi

Manu Gupta

Virginia Commonwealth University (VCU) - Department of Finance, Insurance & Real Estate ( email )

Richmond, VA 23284
United States

Shane A. Johnson (Contact Author)

Texas A&M University - Department of Finance ( email )

Mays School of Business
College Station, TX 77843-4218
United States
979-862-3318 (Phone)

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