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Are CEOs Myopic? A Dynamic Model of the Ongoing Debate

In: Corporate Governance in the US and Global Settings

Author

Listed:
  • Moren Levesque
  • Phillip Phan
  • Steven Raymar
  • Maya Waisman

Abstract

We study the events that motivate CEOs to underinvest in R&D long-term projects (CEO myopia). Based on the existing literature in earnings management and agency theory, myopia is likely to become more problematic under five circumstances: when the CEO nears retirement (the CEO horizon problem), R&D projects have very long time horizons (the project horizon problem), the firm’s financial health is deteriorating (the cover-up problem), ownership structure is heavily weighted toward insider owners (minority owner oppression problem), and when the threat of hostile takeover increases (the entrenchment problem). We setup a dynamic simulation model in which rational CEOs maximize the total value of their bonus compensation over their tenure. Our findings related to the five circumstances are consistent with the extant literature. However, we found an unexpected stable, nonlinear (inverted U-shaped) relationship between CEO tenure and R&D investment. We discuss the theoretical implications of our model and offer suggestions for future research.

Suggested Citation

  • Moren Levesque & Phillip Phan & Steven Raymar & Maya Waisman, 2014. "Are CEOs Myopic? A Dynamic Model of the Ongoing Debate," Advances in Financial Economics, in: Corporate Governance in the US and Global Settings, volume 17, pages 125-151, Emerald Group Publishing Limited.
  • Handle: RePEc:eme:afeczz:s1569-373220140000017004
    DOI: 10.1108/S1569-373220140000017004
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