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The costs and benefits of long-term CEO contracts

Xu, Moqi (2011) The costs and benefits of long-term CEO contracts. . (Unpublished)

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Abstract

This paper uses a new dataset of 3,717 US CEO employment contracts to study the time horizon of CEOs. Longer contracts offer better protection against dismissals: turnover probability increases by 20% each year that passes towards contract expiration. In theory, this should encourage CEOs to pursue long-term projects. Using an instrumental variable approach based on inter-state judicial differences, I show that contract horizon is indeed positively correlated with investment. However, longer contracts also make it harder to dismiss undisciplined managers and therefore impose less discipline. Consistent with this argument, CEOs under short-term contracts perform better in (the fewer) acquisitions that they make, and CEOs under longer contracts enjoy more salary increases and perquisites. Overall, firm value does not differ across contract types.

Item Type: Monograph (Working Paper)
Additional Information: © 2011 The author
Library of Congress subject classification: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Journal of Economic Literature Classification System: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers; Acquisitions; Restructuring; Corporate Governance
J - Labor and Demographic Economics > J4 - Particular Labor Markets > J41 - Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets
J - Labor and Demographic Economics > J6 - Mobility, Unemployment, and Vacancies > J63 - Turnover; Vacancies; Layoffs
Sets: Departments > Finance
Collections > Economists Online
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 16 Apr 2012 09:30
URL: http://eprints.lse.ac.uk/43083/

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