Are CEOs myopic? A dynamic model of the ongoing debate

Moren Levesque, Phillip Phan, Steven Raymar, Maya Waisman

Research output: Contribution to journalArticlepeer-review

Abstract

We study the events that motivate CEOs to underinvest in R&D longterm 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.

Original languageEnglish (US)
Pages (from-to)125-151
Number of pages27
JournalAdvances in Financial Economics
Volume17
DOIs
StatePublished - Jan 1 2014

Keywords

  • Managerial Decision Making
  • Myopic Investment
  • R&D
  • Simulation Model

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)

Fingerprint Dive into the research topics of 'Are CEOs myopic? A dynamic model of the ongoing debate'. Together they form a unique fingerprint.

Cite this