Reductions in CEO career horizons and corporate policies

Abstract

We provide evidence on the effect of personal shocks that reduce a CEO's expected career horizon on corporate policies. The timing of these events is not predictable based on observable characteristics, and affected CEOs experience greater turnover rates and shorter residual time-in-office. Following the shock, these firms moderate both R&D and capital expenditures and increase cash distributions. While these changes are consistent with greater short-term orientation, they are not detrimental to shareholders, as performance increases after the shock. Earnings management and firm risk remain unchanged, while both CEO total compensation and equity-based compensation decline. Overall, our results indicates that the improved performance comes from the implementation of more efficient firm policies, likely driven by an internal tournament effect after the shock rather than from opportunistic behavior.