CEO contractual protection and managerial short-termism

Publication Type

Conference Paper

Publication Date

8-2012

Abstract

How to address managerial short-termism has been an important issue for companies, regulators, and researchers. In this paper we examine the impact of CEO contractual protection, in the form of employment agreement and severance pay agreement, on managerial short-termism. We find that firms with CEO contractual protection are less likely to cut R&D expenditures to avoid earnings decreases. The effect is both statistically and economically significant. We further find that the effect of CEO contractual protection is stronger in cases where CEOs have stronger incentives to engage in myopic behavior, either due to job security concerns or due to short investment horizon of investors, and in cases where alternative monitoring mechanisms are weaker.

Keywords

employment agreement, severance pay agreement, managerial short-termism

Discipline

Accounting | Corporate Finance | Human Resources Management

Research Areas

Corporate Reporting and Disclosure

Publication

American Accounting Association Annual Meeting

City or Country

Washington DC, USA

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