Does Governance Quality Mitigate Horizon Effects? Investment Patterns Surrounding CEO Departures

40 Pages Posted: 14 May 2004

See all articles by Annita Florou

Annita Florou

Bocconi University

Martin J. Conyon

Bentley University; Wharton School, Center for Human Resources

Date Written: April 2004

Abstract

The recent spate of corporate scandals worldwide has again raised serious concerns about the quality of corporate governance. This paper investigates the role of the board and stock compensation in constraining discretionary reductions in capital expenditure at the year of CEO retirement. Based on a sample of the 460 largest UK listed companies during 1990-1998, we find that board size or leadership structure (separating the posts of CEO and chairman) does not influence investment in fixed capital during the CEO's final year. But, opportunistic cutbacks in fixed asset spending at the time of CEO departure are eliminated in firms with executive-dominated boards. Finally, there is some evidence that stock compensation of outside directors is associated with increased capital expenditure when the CEO retires.

Keywords: Board of Directors, CEO Turnover, Investment Management, Stock Compensation

JEL Classification: G31, G34, M41

Suggested Citation

Florou, Annita and Conyon, Martin J., Does Governance Quality Mitigate Horizon Effects? Investment Patterns Surrounding CEO Departures (April 2004). Available at SSRN: https://ssrn.com/abstract=545982 or http://dx.doi.org/10.2139/ssrn.545982

Annita Florou (Contact Author)

Bocconi University ( email )

Via Roentgen 1
Milan, 20136
Italy

HOME PAGE: http://faculty.unibocconi.eu/annitaflorou/

Martin J. Conyon

Bentley University ( email )

175 Forest Street
Waltham, MA 02145
United States

Wharton School, Center for Human Resources ( email )

3600 Locust Walk
Philadelphia, PA 19104-6365
United States

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