CEO Career Horizon, Corporate Governance, and Real Options: The Role of Economic Short-Termism

43 Pages Posted: 2 May 2018 Last revised: 22 May 2018

See all articles by Joon Mahn Lee

Joon Mahn Lee

Purdue University - Krannert School of Management

Jung Chul Park

University of South Florida

Timothy Folta

University of Connecticut - Department of Management

Date Written: April 16, 2018

Abstract

Combining studies on real options theory and economic short-termism, we propose that, depending on CEOs’ career horizons, CEOs will have heterogeneous interests in and incentives to make real options investments. We argue that compared to CEOs with longer career horizons, CEOs with shorter career horizons will be less inclined to make real options investments because they may not fully reap the rewards during their tenure. In addition, we argue that long-term incentives and institutional ownership will mitigate the relationship between CEOs’ career horizons and real options investments. U.S. public firms as an empirical setting produced consistent evidence for our predictions. Our study is the first to theoretically explain and empirically show that a CEO’s self-seeking behavior will impact decisions regarding real options investments.

Keywords: Real Options, Economic Short-Termism, CEO Career Horizon, Agency Theory, Long-Term Investment, Strategic Flexibility

JEL Classification: G30, M12, G02

Suggested Citation

Lee, Joon Mahn and Park, Jung Chul and Folta, Timothy, CEO Career Horizon, Corporate Governance, and Real Options: The Role of Economic Short-Termism (April 16, 2018). University of Connecticut School of Business Research Paper No. 18-19, Available at SSRN: https://ssrn.com/abstract=3163701 or http://dx.doi.org/10.2139/ssrn.3163701

Joon Mahn Lee (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Jung Chul Park

University of South Florida ( email )

Tampa, FL 33620
United States
813-974-9680 (Phone)
813-974-3084 (Fax)

HOME PAGE: http://www.usf.edu/business/contacts/park-jung-chul.aspx

Timothy Folta

University of Connecticut - Department of Management ( email )

Storrs, CT 06269-1041
United States

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