Short-Horizon CEO Incentives and Abnormal Stock Returns, Insider Trading, and Earnings Management

Abstract

Firms with short-horizon CEO incentives experience stock price inflation followed by reversal. Short-horizon CEOs exploit the price inflation by selling relatively more stock and making greater abnormal profits than long-horizon CEOs do. The stock price inflation is partly explained by greater earnings surprises and more positive investor reaction to the surprises. To sustain the inflated price, short-horizon firms are more likely to employ income-increasing discretionary accruals. The findings are consistent with recent theories linking short-horizon incentives to stock price inflation, suggest CEOs have some success in doing so, and shed light on the role earnings management plays in the process.