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Myopic Corporate Behaviour and CEO Quality

Author

Listed:
  • Andrew Dickerson
  • Christopher J. Ellis
  • John Peirson

Abstract

We develop and test a simple asymmetric information model of CEO quality, in which CEOs know their quality and shareholders may only infer this from observations of corporate profits. CEOs signal their quality to shareholders by manipulating the time path of corporate profits. Though shareholders act optimally, this signalling is inefficient and produces the features of managerial myopia. When there is a pooling equilibrium, this inefficiency may be reduced by the provision to CEOs of Golden Parachutes or long term contracts. When there is a separating equilibrium these measures may not be used to increase efficiency. The assumptions and predictions of the model are validated by comparison with existing evidence and tested against American data on company performance and CEO turnover.

Suggested Citation

  • Andrew Dickerson & Christopher J. Ellis & John Peirson, 1996. "Myopic Corporate Behaviour and CEO Quality," Studies in Economics 9611, School of Economics, University of Kent.
    • Handle: RePEc:ukc:ukcedp:9611
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    More about this item

    Keywords

    Managerial Myopia; Short-Termism; CEO Turnover; Corporate Performance; Signalling;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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