Does Governance Quality Mitigate Horizon Effects? Investment Patterns Surrounding CEO Departures
40 Pages Posted: 14 May 2004
Date Written: April 2004
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: Suggested Citation