Investor horizon and CEO horizon incentives

Brian Cadman, Jayanthi - Sunder

Research output: Contribution to journalArticle

18 Citations (Scopus)

Abstract

We examine the relation between shareholder investment horizon and chief executive officer (CEO) horizon incentives derived from compensation contracts. We find that influential incumbent shareholders provide managers with short-horizon incentives to maximize current firm value when these shareholders plan to sell their stock. Specifically, we use the initial public offering (IPO) setting in which venture capitalists (VCs) represent short-horizon, controlling investors with strong selling incentives after the IPO. We predict and find that VCs' short-term incentives influence CEO's annual horizon incentives following the IPO. At the same time, institutional monitoring limits the influence of VCs on annual, short-horizon incentives. To preempt this disciplining by market participants, VCs grant equity prior to the IPO that correspond with their short-horizons and result in shorter portfolio horizon incentives for the CEO after the IPO. We also document a positive relation between long-run abnormal stock returns and horizon incentives, consistent with horizon incentives influencing management actions.

Original languageEnglish (US)
Pages (from-to)1299-1328
Number of pages30
JournalAccounting Review
Volume89
Issue number4
DOIs
StatePublished - Jul 1 2014

Fingerprint

Chief executive officer
Investors
Incentives
Initial public offerings
Venture capitalists
Shareholders
Monitoring
Equity
Stock returns
Incumbents
Firm value
Managers
Investment horizon

Keywords

  • Equity incentives
  • Executive compensation
  • Governance
  • Venture capital

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Investor horizon and CEO horizon incentives. / Cadman, Brian; Sunder, Jayanthi -.

In: Accounting Review, Vol. 89, No. 4, 01.07.2014, p. 1299-1328.

Research output: Contribution to journalArticle

Cadman, Brian ; Sunder, Jayanthi -. / Investor horizon and CEO horizon incentives. In: Accounting Review. 2014 ; Vol. 89, No. 4. pp. 1299-1328.
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