Short-Termist CEO Compensation in Speculative Markets: A Controlled Experiment

74 Pages Posted: 14 Jul 2017 Last revised: 16 Oct 2021

See all articles by Yen-Cheng Chang

Yen-Cheng Chang

National Taiwan University - College of Management; National Taiwan University - Center for Research in Econometric Theory and Applications

Minjie Huang

University of Louisville - Department of Finance

Yu-Siang Su

National Taiwan University - Department of Finance

Kevin Tseng

National Taiwan University - Department of Finance; National Taiwan University - Center for Research in Econometric Theory and Applications

Date Written: December 1, 2020

Abstract

Bolton, Scheinkman, and Xiong (2006) analyze a setting where investors disagree and short-sale constraints cause pessimistic views of stock prices to be sidelined, which leads to speculative stock prices. A theoretical implication of the model is that existing shareholders can exploit the speculative stock prices by (1) designing managerial compensation contracts that encourage short-term performance and (2) subsequently selling their shares to more optimistic investors. We document empirical support for this theory by finding that an exogenous removal of short-sale constraints curbs the provision of short-term incentives, an effect reflected in longer CEO compensation duration. The effect is concentrated among stocks with high investor disagreement and short-term-oriented institutional ownership. Consistent with prior work, we also find that longer CEO compensation duration leads to longer CEO investment horizons, less over-investment, and less earnings management.

Keywords: CEO Compensation, Speculative Market, Disagreement, Institutional Ownership

JEL Classification: J33, M12, G30

Suggested Citation

Chang, Yen-Cheng and Huang, Minjie and Su, Yu-Siang and Tseng, Kevin, Short-Termist CEO Compensation in Speculative Markets: A Controlled Experiment (December 1, 2020). Contemporary Accounting Research, 2021, Vol. 38, pp. 2105-2156, Available at SSRN: https://ssrn.com/abstract=3002525 or http://dx.doi.org/10.2139/ssrn.3002525

Yen-Cheng Chang (Contact Author)

National Taiwan University - College of Management ( email )

Department and Graduate Institute of Finance
College of Management
Taipei 106
Taiwan

National Taiwan University - Center for Research in Econometric Theory and Applications ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Minjie Huang

University of Louisville - Department of Finance ( email )

College of Business
Harry Frazier Hall
Louisville, KY 40292
United States

Yu-Siang Su

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Kevin Tseng

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

National Taiwan University - Center for Research in Econometric Theory and Applications ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

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