CEO career horizon, corporate governance, and real options: The role of economic short-termism

Joon Mahn Lee, Jung Chul Park, Timothy B. Folta

Research output: Contribution to journalArticle

Abstract

Research Summary: Combining studies on real options theory and economic short-termism, we propose that, depending on CEOs’ career horizons, CEOs have heterogeneous interests in strategic flexibility, and thus, have different incentives to make real options investments. We argue that compared to CEOs with longer career horizons, CEOs with shorter career horizons will be less inclined to make real options investments because they may not fully reap the rewards during their tenure. In addition, we argue that long-term incentives and institutional ownership will mitigate the relationship between CEOs’ career horizons and real options investments. U.S. public firms as an empirical setting produced consistent evidence for our predictions. Our study is the first to theoretically explain and empirically show that a CEO's self-seeking behavior will impact real options investments. Managerial Summary: This article helps to explain how a CEO's self seeking-behavior may shape a firm's real option investment, which could result in different level of strategic flexibility. We argue that CEOs with short career horizons have less time to exercise their firms’ real options, which should lower the investments in the firms’ real options portfolios relative to CEOs with long career horizons. We study a sample of U.S. public firms and find strong evidence that a CEO's expected tenure in the firm is positively related to the real options investments at the firm level. We find that this agency issue can be mitigated by adopting appropriate corporate governance mechanisms such as long-term incentives and institutional investors.

Original languageEnglish
Pages (from-to)2703-2725
Number of pages23
JournalStrategic Management Journal
Volume39
Issue number10
DOIs
Publication statusPublished - 2018 Oct 1

Fingerprint

Corporate governance
Short-termism
Real options
Economics
Chief executive officer
Incentives
Public firm
Tenure
Strategic flexibility
Reward
Prediction
Real options theory
Corporate governance mechanisms
Institutional ownership
Exercise
Institutional investors

Keywords

  • agency theory
  • CEO career horizon
  • economic short-termism
  • real options
  • strategic flexibility

ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management

Cite this

CEO career horizon, corporate governance, and real options : The role of economic short-termism. / Lee, Joon Mahn; Park, Jung Chul; Folta, Timothy B.

In: Strategic Management Journal, Vol. 39, No. 10, 01.10.2018, p. 2703-2725.

Research output: Contribution to journalArticle

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