The Costs and Benefits of Long-Term CEO Contracts by Moqi Xu :: SSRN

The Costs and Benefits of Long-Term CEO Contracts by Moqi Xu :: SSRN: Abstract:

A good explanation of why long term contracts may increase investments but at the cost of worse short-term performance.

"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."