The impact of CEO contract duration on corporate misconduct

Abstract

CEOs play a crucial role in mitigating organisational misconduct. However, previous studies have mainly focused on the CEO characteristics that help firms choose an appropriate CEOs. Less is known about how to manage risk through contract design when appointing a chief executive to reduce misconduct. This study examines how CEO contract duration affects the likelihood of corporate misconduct. We bridge agency and upper echelon theories to hypothesise the impact of CEO contract duration on corporate misconduct. We also examine how CEO compensation and firm ownership concentration moderate this relationship. Using data collected from multiple sources, we analyse the impact of CEO contract duration on corporate misconduct in listed companies from 1994 to 2022. The results show a U-shaped relationship between CEO contract duration and misconduct. Initially, misconduct decreases with longer CEO contracts but begins to increase as the duration extends further. This relationship is strengthened when CEO compensation and ownership concentration decrease. We also investigate the relationship between CEO succession contract duration and the actual tenure situation, and the results are generally consistent with our hypothesis. Overall, CEO succession contract duration at an intermediate level is more effective in reducing corporate misconduct than other contract durations. Our conclusions contribute to the research on the relationship between CEO contract design and corporate misconduct.