Do Managers Act Opportunistically Towards the End of Their Career?

41 Pages Posted: 26 Jul 2016 Last revised: 16 Jun 2018

See all articles by Rezaul Kabir

Rezaul Kabir

University of Twente - Department of Finance and Accounting

Hao Li

Heriot-Watt University

Yulia V. Veld-Merkoulova

Monash University - Department of Finance; Financial Research Network (FIRN)

Date Written: November 6, 2017

Abstract

As managers approach retirement, their career horizons become shorter and they might start to behave opportunistically by taking a more risk-averse and short-term orientation. Long-term risky investments, such as research and development, can suffer the most from this problem as their payoff comes long after CEOs retire. To mitigate such behavior, most executive compensation contracts include long-term performance incentives. In this study, we hypothesize that long-term debt-like compensation in the form of defined benefit pension can make the career horizon problem more severe. We empirically examine the impact of managerial opportunism, influenced by pension compensation, on the research and development investments. We find that on average UK CEOs do not curtail research and development as their career horizons become shorter. But, the defined-benefit pension component of executive compensation leads CEOs, who are closer to retirement, to decrease R&D investments. Our results imply that executive compensation contracts need to be appropriately adjusted when managers approach retirement.

Keywords: Risk-taking, Executive compensation, Career horizon, Pension

JEL Classification: G30, G34

Suggested Citation

Kabir, Rezaul and Li, Hao and Veld-Merkoulova, Yulia V., Do Managers Act Opportunistically Towards the End of Their Career? (November 6, 2017). Available at SSRN: https://ssrn.com/abstract=2814451 or http://dx.doi.org/10.2139/ssrn.2814451

Rezaul Kabir

University of Twente - Department of Finance and Accounting ( email )

Faculty of Behavioral, Management & Social Science
P. O. Box 217
Enschede, 7500 AE
Netherlands
+31 53 489 4512 (Phone)
+31 53 489 2159 (Fax)

HOME PAGE: http://https://people.utwente.nl/r.kabir

Hao Li

Heriot-Watt University ( email )

Riccarton
Edinburgh, Scotland EH14 4AS
United Kingdom

Yulia V. Veld-Merkoulova (Contact Author)

Monash University - Department of Finance ( email )

Building H
Caulfield, Victoria 3145
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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