Impact of Internal Governance on a CEO’s Investment Cycle

58 Pages Posted: 23 Sep 2020 Last revised: 23 Dec 2020

See all articles by Ivan Brick

Ivan Brick

Rutgers Business School at Newark and New Brunswick

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics; Columbia University - Law School

Yankuo Qiao

Rutgers Business School at Newark and New Brunswick

Date Written: July 27, 2020

Abstract

This paper examines the impact of internal governance on a CEO’s investment cycle. Extant literature defines internal governance as the mechanism by which senior executives help discipline the CEO to maximize shareholder value. Weisbach (1995) finds that a year or two before the CEO retires, the firm experiences a decrease in total investment. Pan, Wang and Weisbach (2016) find evidence of a CEO’s investment cycle, in which investment increases over a CEO’s tenure, whereas disinvestment decreases. These papers suggest that older CEOs incur agency costs as they try to extract rents as their investment horizon declines. We confirm their results, and additionally find that good internal governance helps reduce older CEOs under-investing before their exit. For younger CEOs we do not find any relationship between internal governance and investment. This suggests that older CEOs who face good internal governance under-invest less. We also find that new incoming CEOs divest these projects profitably. These results are robust to: normal CEO retirements (exclude performance-related turnover), sudden CEO deaths, and controlling for measures of board size, proportion of outsiders on the board, 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's Investment Cycle, CEO Turnover

JEL Classification: G30, G31

Suggested Citation

Brick, Ivan and Palia, Darius and Qiao, Yankuo, Impact of Internal Governance on a CEO’s Investment Cycle (July 27, 2020). Available at SSRN: https://ssrn.com/abstract=3670325 or http://dx.doi.org/10.2139/ssrn.3670325

Ivan Brick

Rutgers Business School at Newark and New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States
07102 (Fax)

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Columbia University - Law School ( email )

435 W 116th St.
New York, NY 10027
United States

Yankuo Qiao (Contact Author)

Rutgers Business School at Newark and New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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