Managerial Horizons Research Articles

Managerial Horizon and Corporate Labor Policies: Evidence from Fixed-Term Boards

Managerial Horizon and Corporate Labor Policies: Evidence from Fixed-Term Boards

CEO firm‐related wealth, managerial horizon, and earnings management

AbstractThis paper examines the effects of the managerial horizon, CEO pay‐performance sensitivity, and CEO firm‐related wealth on earnings management. Using two measures of pay‐performance sensitivity (CEODelta and CEOVega) in our regression analysis, we find that CEO pay‐performance sensitivity significantly affects earnings management in the early years of the CEO's services, not in retirement years. We further examine the earnings management behavior surrounding the retirement years and find that the pay‐performance sensitivity of CEO compensation is negatively associated with earnings management. Furthermore, the closer the retirement year, the lower level of earnings management observed in our sample. Finally, we further examine whether the CEOs’ firm‐related wealth affects earnings management during CEO tenure and find that CEO's firm‐related wealth also has a pronounced effect on earnings management during the CEO tenure.

Uncertainty about managerial horizon and voluntary disclosure

Uncertainty about managerial horizon and voluntary disclosure

Managerial Horizon and Corporate Labor Policies: Evidence from Fixed-Term Boards

Managerial Horizon and Corporate Labor Policies: Evidence from Fixed-Term Boards

On Market Concentration and Disclosure

ABSTRACT Verrecchia (1983, 1990) introduced the proprietary cost hypothesis in which exogenous disclosure costs are a reduced-form interpretation of lost competitive advantage in product markets. We develop a micro-foundation for this disclosure cost in a Cournot game and explicitly derive the cost as a function of market structure. When the market is sufficiently competitive, this model has a reduced-form representation similar to a standard voluntary disclosure game with a partial disclosure equilibrium. Proprietary costs are increasing in the number of competitors, the degree of product substitution, overall uncertainty, and production costs. The analysis also offers new empirical predictions on the interaction between disclosure choice, managerial horizon, and entry. JEL Classifications: D82; L13; L50; M23; M4.

Investor horizon and managerial short-termism

This paper shows that long-term shareholders embed horizon incentives in executive compensation contracts as a mechanism to promote long-term oriented managerial behavior. Increase in long-term institutional ownership leads to longer equity vesting periods measured by CEO pay duration. Further, CEO pay duration decreases following hedge-fund activism that is often argued to be associated with short-term investment horizon. To establish causality, we use institutional mergers as an exogenous change in institutional investor horizon, and to address reverse causality, we use the indexing behavior of institutions. We support our findings by providing evidence that long-term institutional ownership is associated with long-term oriented shareholder proposals. Overall, CEO pay duration is a potential mechanism for institutional investors to align managerial horizon with their investment horizon, and ultimately to influence corporate behavior.

Uncertainty about Managerial Horizon and Voluntary Disclosure

I examine the relation between investors’ uncertainty about managerial horizon and corporate voluntary disclosure. I argue that investors’ uncertainty about the manager’s short-term stock price concern works as a disclosure friction that allows for a partial disclosure equilibrium. When investors are uncertain about managers’ horizons, short-horizon managers can withhold bad news by pooling with long-horizon managers who are not motivated to disclose regardless of the content of the news, as they are largely indifferent to short-term stock prices. Based on this theoretical framework, I hypothesize that reducing investors’ uncertainty about managerial horizon reduces this disclosure friction, thereby pressuring short-horizon managers to provide more voluntary disclosure. I use the executive compensation disclosure mandate as an empirical setting that reduced investors’ uncertainty about managerial horizon. Employing a difference-in-differences research design, I find a significant increase in voluntary disclosure for treated firms relative to control firms, largely driven by firms with short-horizon managers.

On Market Concentration and Disclosure

Verrecchia (1983, 1990) introduced the proprietary cost hypothesis in which exogenous disclosure costs are a reduced-form interpretation of lost competitive advantage in product markets. We develop a micro-foundation for this disclosure cost in a Cournot game and explicitly derive the cost as a function of market structure. When the market is sufficiently competitive, this model has a reduced-form representation similar to a standard voluntary disclosure game with a partial disclosure equilibrium. Proprietary costs are increasing in the number of competitors, the degree of product substitution, overall uncertainty and production costs. The analysis also offers new empirical predictions on the interaction between disclosure choice, managerial horizon and entry.

The effect of managerial horizon on cash holdings

PurposeUS corporations are now sitting on an enormous stockpile of cash. Instead of investing their resources and creating jobs, the firms are holding on to excess cash. Academicians and practitioners alike have tried to fathom the reasons why companies are holding on to so much cash. Numerous studies have talked about the various motives for holding cash. Many researchers have tried to correlate excess cash holding with particular firm characteristics. The purpose of this paper is to study the correlations that exist between excess cash holding and some measurable managerial characteristics.Design/methodology/approachFour different measures of managerial horizon (MH) were constructed. The first two constructs (MH1 and MH2) are based on the CEO’s age and how long he has been the CEO of the company. The next two constructs (MH3 and MH4) are based on compensation, proportion of current compensation and proportion of future compensation. This paper tries to examine if MH has any impact on excess cash holding.FindingsThe results clearly show that the CEO age and the proportion of CEO’s compensation (current and future) do determine level of cash holding in the company. Younger CEOs hold more cash compared to older CEOs. Older CEOs hold less cash suggesting that as CEOs grow older they might be motivated by the idea of leaving a long lasting legacy. CEOs who receive more of their compensation in future payments also hold on to more cash, whereas CEOs who receive more of their compensation in current payments hold less cash.Originality/valueThere is no previous literature dealing with MH and cash holding by corporations.

Investor Horizon and Managerial Short-Termism

This paper shows that long-term shareholders embed horizon incentives in executive compensation contracts as a mechanism to promote long-term oriented managerial behavior. Increases in long-term institutional ownership lead to longer equity vesting periods measured by CEO pay duration. Further, CEO pay duration decreases following hedge-fund activism that is often argued to be associated with short-term investment horizon. To establish causality, we use institutional mergers as an exogenous change in institutional investor horizon, and to address reverse causality, we use the indexing behavior of institutions. Overall, CEO pay duration is a potential mechanism for institutional investors to align managerial horizon with their investment horizon, and ultimately to influence corporate behavior.

Managerial decision horizon and real estate investment trusts (REITs)

PurposeThe purpose of this paper is to examine the effects of managerial decision horizon (MDH) on real estate investment trust (REIT) behavior and performance.Design/methodology/approachIn this study, the authors expand the number of proxies and measure managerial horizon by CEO age, CEO tenure, cash compensation relative to total compensation, and the amount of vested equity-based compensation to total compensation. To avoid potential measurement error, the authors compute the average ranking score of the four individual measures to determine the overall MDH of a CEO. Cross-sectional time series regressions are then performed on the effects of CEO MDH on REIT policies and performance. The authors also examine if the effect of myopic MDH can be mitigated by good corporate governance. For robustness purpose, the authors also compare the effects of age-related MDH and compensation-related MDH.FindingsThe results show that REITs managed by CEOs with short MDHs have lower levels of asset growth and a lower standard deviation of return on assets. These REITs also have lower debt levels, lower dividend payouts, and hold more cash. The results suggest that short-horizon CEOs have incentives to lower investment risk, default risk, and liquidity risk at the firm level in order to protect personal benefits. CEOs with a short horizon also have a negative impact on REIT performance. The results also show that CEO compensation-related horizon problems are mitigated by corporate governance, but CEO age-related horizon problems are significant and persistent. The results suggest that age-related behavioral biases of the CEO are important determinants of corporate decisions.Practical implicationsThe results of this study suggest that the managerial behavioral biases should be considered in understanding firm behavior.Originality/valueThis is the first study that examines the effects of MDH on REIT behavior and performance. The unique regulatory environment of REITs makes them less susceptible to agency problems of free cash flow and thus provides a clearer picture of the effect of MDH. Prior studies focus on the effect of managerial horizon on firm investment activity, this study expands the scope to examine the effects on investment and financial policies. In addition, this study adds to the literature by showing that the effect of age-related horizon problems may not be mitigated by good corporate governance.

The Effect of Firm Ownership on the Relation between CEO Turnover and Earnings Management

The Effect of Firm Ownership on the Relation between CEO Turnover and Earnings Management

CEO Origin and Accrual-Based Earnings Management

SYNOPSIS This study examines the influence of CEO origin on accrual-based earnings management and how these effects evolve over the CEO's tenure in office. Compared with CEOs promoted from within the company, CEOs recruited from outside have a stronger incentive to demonstrate their abilities in the initial years after their appointment; these outside CEOs also may have a lower expectation of surviving the short run. We predict and find that outside CEOs engage in greater income-increasing manipulation in the early years of their tenure. However, the differences in earnings management practices become insignificant after CEOs survive the short run. Our results are robust to a variety of alternative hypotheses and sensitivity checks. The findings thus show that CEO origin is an important factor for explaining financial reporting strategies; they also add to our understanding of CEO origin, managerial horizon problems, and the determinants of aggressive accounting. Data Availability: The data used in this study are publicly available from the sources indicated in the text.

Executive Compensation and Horizon Incentives: An Empirical Investigation of Corporate Cash Payout

The recent financial crisis has renewed the interest in executives’ compensation-related horizon incentives. This paper examines how the short-termism in CEO compensation affects corporate cash payout through share repurchases using a new measure of compensation horizon incentive. In contrast to the conventional wisdom that firms buy back shares after poor stock performance, we find that CEOs with short compensation horizons are more likely to buy back shares after good performance. To bolster already high stock price, they have incentives to repurchase to boost up reported EPS towards analysts’ expectations, and to cater to investors with short investment horizons. This short-termism is not related to corporate governance, but is more severe in firms that have less liquid stocks. While long-term shareholders do not benefit from such repurchases, short-termist CEOs benefit by selling their own holdings when firms are buying. Our findings suggest that some large cash payouts by firms with short managerial horizons during the repurchase binge in 2005-2008 may be premature, which portraits a striking contrast from the liquidity constraints that many firms experienced later during the crisis. ∗ I thank Long Chen, Jie Gan, Radha Gopalan, Vidhan Goyal, Paul Malatesta, and seminar participants in Singapore Management University for their helpful comments. Author contacts: Lee Kong Chian School of Business, Singapore Management University, 50 Stamford Road, Singapore 178899. Email: shenghuang@smu.edu.sg. Tel: (65) 68280252

Managerial horizons in stock financed mergers

Abstract We examine managerial decision horizons for target and acquirer firms in stock financed mergers and acquisitions. We find that acquirer CEOs have longer decision horizons than target firm CEOs in stock financed mergers. Acquirer CEOs in cash financed mergers and acquisitions also have longer decision horizons than target CEOs. Acquirer CEOs in both stock and cash financed mergers have significantly higher proportions of equity based compensation and significantly lower proportions of cash based compensation than target CEOs. In logistic regressions, measures of decision horizons for target and acquirer CEOs are not significantly related to the odds of stock financing in mergers and acquisitions. Moreover, measures of managerial decision horizons are not uniformly higher for stock acquirers or uniformly lower for stock targets on comparison with CEOs of firms of similar size. Our results do not offer strong support to the implications from the Shleifer and Vishny theory on the rationale for stock financed acquisitions.

Market Misvaluation, Managerial Horizon, and Acquisitions

This paper analyzes the impact of managerial horizon on mergers and acquisitions activity. The main predication is that acquiring firms managed by short‐horizon executives have higher abnormal returns at acquisition announcements, less likelihood of using equity to pay for the transactions, and inferior postmerger stock performance in the long run. I construct two proxies for managerial horizon based on the CEO's career concern and compensation scheme, and provide empirical evidence supporting the above prediction. Moreover, I also demonstrate that long‐horizon managers are more likely to initiate acquisitions in response to high stock market valuation.

Market Misvaluation, Managerial Horizon, and Acquisitions

This paper analyzes the impact of managerial horizon on mergers and acquisitions activity. The main predication is that acquiring firms managed by short horizon executives have higher abnormal returns at acquisition announcements, less likelihood of using equity to pay for the transactions, and inferior post-merger stock performance in the long run. I construct two proxies for managerial horizon based on the CEO’s career concern and compensation scheme, and provide empirical evidence supporting the above prediction. Moreover, I also demonstrate that long horizon managers are more likely to initiate acquisitions in response to high stock market valuation.

On Tournament Behavior in Hedge Funds: High Water Marks, Managerial Horizon, and the Backfilling Bias

We analyze the risk choices by hedge funds that perform poorly, relative to other funds and in absolute terms - and test predictions on the extent to which these decisions are related to the fund's incentive contract, investment horizon and dissemination of performance information. We find that tournament behavior is more prevalent in the (backfilled) period when funds may be at an incubation stage, before they start voluntarily reporting to a database. Excluding backfilled data, we find that variance shifts depend on absolute rather than relative fund performance. Consistent with theoretical arguments, the propensity for losing funds to increase risk is significantly weaker among those that tie the manager's incentive pay to the fund's high-water mark - suggesting a possible benefit from such incentive structures - and among funds that face little immediate risk of closure. Overall, the combination of factors such as reporting performance to a database, high-water mark provisions, and low risk of fund closure appear to make poorly performing funds more conservative with regard to risk-shifting.

On Tournament Behavior in Hedge Funds: High Water Marks, Managerial Horizon, and the Backfilling Bias

On Tournament Behavior in Hedge Funds: High Water Marks, Managerial Horizon, and the Backfilling Bias

On Tournament Behavior in Hedge Funds: High Water Marks, Managerial Horizon, and the Backfilling Bias

On Tournament Behavior in Hedge Funds: High Water Marks, Managerial Horizon, and the Backfilling Bias