Thursday, June 23, 2011

INSEAD Working Paper 2011/73/FIN

This paper studies contract horizon and investment using a new dataset of 3,717 US CEO employment contracts. It finds that contract horizon (1) predicts realized tenure, (2) is positively correlated with both capital expenditure and R&D expenses, and (3) firms do not perform better when the CEO has less time. I control for endogeneity using inter-state differences in the judicial treatment of contracts as an instrumental variable for the choice between contract types. The impact of contract horizon remains significant controlling for long-term compensation and executive fixed effects. I conclude that CEO contract horizon has a positive influence on investment.