CEO Career Horizon, Corporate Governance, and Real Options: The Role of Economic Short-Termism

Abstract

Combining studies on real options theory and economic short-termism, we propose that, depending on CEOs’ career horizons, CEOs will have heterogeneous interests in and incentives to make real options investments. We argue that compared to CEOs with longer career horizons, CEOs with shorter career horizons will be less inclined to make real options investments because they may not fully reap the rewards during their tenure. In addition, we argue that long-term incentives and institutional ownership will mitigate the relationship between CEOs’ career horizons and real options investments. U.S. public firms as an empirical setting produced consistent evidence for our predictions. Our study is the first to theoretically explain and empirically show that a CEO’s self-seeking behavior will impact decisions regarding real options investments.