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CEO Investment Cycles

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  • Yihui Pan
  • Tracy Yue Wang
  • Michael S. Weisbach

Abstract

This paper documents the existence of a CEO investment cycle, in which disinvestment decreases over a CEO's tenure, while investment increases, leading to “cyclical” firm growth in assets and employment. The estimated variation in investment rate over the CEO investment cycle is of the same order of magnitude as the differences caused by business cycles or financial constraints. Results from a number of tests generally support the view that the investment cycle is caused by agency problems, leading to increasing investment quantity and decreasing investment quality over time as the CEO gains more control over his board.Received February 17, 2015; accepted October 1, 2015 by Editor David Denis.

Suggested Citation

  • Yihui Pan & Tracy Yue Wang & Michael S. Weisbach, 2016. "CEO Investment Cycles," The Review of Financial Studies, Society for Financial Studies, vol. 29(11), pages 2955-2999.
    • Handle: RePEc:oup:rfinst:v:29:y:2016:i:11:p:2955-2999.
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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • 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
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions

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