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Investor horizon and managerial short-termism

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  • Lel, Ugur
  • Tepe, Mete

Abstract

This paper shows that long-term shareholders embed horizon incentives in executive compensation contracts as a mechanism to promote long-term oriented managerial behavior. Increase in long-term institutional ownership leads to longer equity vesting periods measured by CEO pay duration. Further, CEO pay duration decreases following hedge-fund activism that is often argued to be associated with short-term investment horizon. To establish causality, we use institutional mergers as an exogenous change in institutional investor horizon, and to address reverse causality, we use the indexing behavior of institutions. We support our findings by providing evidence that long-term institutional ownership is associated with long-term oriented shareholder proposals. Overall, CEO pay duration is a potential mechanism for institutional investors to align managerial horizon with their investment horizon, and ultimately to influence corporate behavior.

Suggested Citation

  • Lel, Ugur & Tepe, Mete, 2021. "Investor horizon and managerial short-termism," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 1-20.
    • Handle: RePEc:eee:quaeco:v:80:y:2021:i:c:p:1-20
    DOI: 10.1016/j.qref.2021.01.013
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    More about this item

    Keywords

    Investor horizon; CEO myopia; Short-termism; Pay duration; Hedge fund activism;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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