Impact of Internal Governance on a CEO’s Investment Cycle

Abstract

The investment cycle literature suggests that older CEOs with short investment horizon may be myopic and as result incur agency costs as they try to extract rents by under-investing. Acharya, Myers and Rajan (2011) theorize that internal governance may mitigate the CEO horizon problem. We find that good internal governance helps reduce older CEOs under-investing before their exit. These results are robust to: normal CEO retirements, sudden CEO deaths, while controlling for measures of board characteristics, CEO’s pay-performance sensitivity, CEO pay slice, CEO power, firm complexity and if the CEO was an outsider or not.

Keywords: Internal Governance, Agency Theory, Executive Horizon, CEO Investment Cycle

JEL Classification: G30, G31