Investor Horizon and CEO Horizon Incentives
53 Pages Posted: 12 Jan 2007 Last revised: 3 Feb 2014
Date Written: January 29, 2014
We examine the relation between shareholder investment horizon and CEO horizon incentives derived from compensation contracts. We find that influential incumbent shareholders provide managers with short-horizon incentives to maximize current firm value when these shareholders plan to sell their stock. Specifically, we use the IPO setting in which venture capitalists represent short-horizon, controlling investors with strong selling incentives after the IPO. We predict and find that VC’s short-term incentives influence CEO’s annual horizon incentives following the IPO. At the same time, institutional monitoring limits the influence of VCs on annual, short-horizon incentives. To preempt this disciplining by market participants, VCs grant equity prior to the IPO that correspond with their short-horizons and result in shorter portfolio horizon incentives for the CEO after the IPO. We also document a positive relation between long-run abnormal stock returns and horizon incentives, consistent with horizon incentives influencing management actions.
Keywords: Executive Incentives, Venture Capital, Governance, Stock Options, Vesting, Horizon Incentives
JEL Classification: G24, J33, G34, J41, M52
Suggested Citation: Suggested Citation