Investor Horizon and CEO Horizon Incentives

53 Pages Posted: 12 Jan 2007 Last revised: 3 Feb 2014

See all articles by Brian D. Cadman

Brian D. Cadman

University of Utah - David Eccles School of Business

Jayanthi Sunder

University of Arizona - Eller College of Management

Date Written: January 29, 2014

Abstract

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

Cadman, Brian D. and Sunder, Jayanthi, Investor Horizon and CEO Horizon Incentives (January 29, 2014). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=956601 or http://dx.doi.org/10.2139/ssrn.956601

Brian D. Cadman (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 Campus Center Drive
Salt Lake City, UT 84112
United States
801-585-9517 (Phone)

HOME PAGE: http://www.business.utah.edu/bio/briancadman

Jayanthi Sunder

University of Arizona - Eller College of Management ( email )

School of Accountancy
1130 E Helen St.
Tucson, AZ 85721
United States
520-626-8489 (Phone)

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