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The CEO Horizon Problem and Managerial Slack in China

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  • Fang, Junxiong
  • He, Lerong
  • Conyon, Martin J.

Abstract

This study investigates how CEO behavior and incentives change during the CEO's final years in office, known as the horizon problem. We examine how the horizon problem alters managerial slack, a measure of operational inefficiency and managerial value diversion. Using data on Chinese publicly traded firms between 2003 and 2011, we find that managerial slack increases in the last two years of CEO tenure compared to earlier years. We also show that the increase in managerial slack in CEO final years in office is smaller in privately controlled firms than in state-owned enterprises, smaller in firms with CEO equity ownership and more independent boards compared to those without. We conclude that higher quality corporate governance mechanisms ameliorate the perverse incentives associated with the CEO horizon problem, and reduce CEOs’ tendency to increase managerial slack during their final years in office.

Suggested Citation

  • Fang, Junxiong & He, Lerong & Conyon, Martin J., 2018. "The CEO Horizon Problem and Managerial Slack in China," Management and Organization Review, Cambridge University Press, vol. 14(2), pages 343-376, June.
    • Handle: RePEc:cup:maorev:v:14:y:2018:i:02:p:343-376_00
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    Cited by:

    1. Du, Yunzhou & Kim, Phillip H. & Fourné, Sebastian P.L. & Wang, Xiaowei, 2022. "In times of plenty: Slack resources, R&D investment, and entrepreneurial firms in challenging institutional environments," Journal of Business Research, Elsevier, vol. 145(C), pages 360-376.

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