Reductions in CEO Career Horizons and Corporate Policies
50 Pages Posted: 6 Feb 2019 Last revised: 1 Oct 2019
Date Written: July 16, 2019
We provide evidence on how personal shocks that plausibly reduce a CEO’s career horizon, triggered by either the CEO’s diagnosis of a serious illness or an illness or death of a close relative, affect key corporate policies. We validate our identification strategy by showing that these events are not predictable based on observable characteristics and that CEOs exposed to such events experience greater turnover rates and lower residual time-in-office. Following the shock, and while the CEO remains in office, these firms moderate both R&D and capital expenditures and increase cash distributions. While these results are consistent with greater short-term orientation, these changes are not necessarily detrimental to shareholders, as both operating and stock performance increase in the aftermath of the shock. Earnings management and CEO compensation remain unchanged, indicating that the improved performance comes from the implementation of relatively more efficient firm policies rather than from opportunistic behaviors.
Keywords: CEO, career horizon, tenure, illness, opportunism, investment, R&D, payout
JEL Classification: G32, G34
Suggested Citation: Suggested Citation