Does CEO myopia impede growth opportunities?
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Does CEO myopia impede growth opportunities? Murad Antia1 · Christos Pantzalis1 · Jung Chul Park1
© Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract We present evidence that the negative impact of CEO short-termism on firm value can be attributed to a sub-optimal exercise of real options. Accordingly, the value relevance of firms’ real options portfolios is maximized in the absence of CEO temporal myopia. Moreover, the impact of real options on firms’ stock returns’ idiosyncratic characteristics is more pronounced when CEOs’ decision horizons are longer, in line with the view that enhanced operating flexibility from longer decision horizons can amplify the convexity of real options’ payoffs. These findings have important implications regarding the impact of CEO career horizons on corporate strategies and board decisions related to CEO incentives and succession. Keywords Real options · Managerial myopia · CEO decision horizon · Agency theory · Operating flexibility JEL Classification G32 · G34 · G40
1 Introduction A short-duration relationship between agents and principals can accentuate agency costs because it increases risks on agents resulting from firm performance volatility rooted in factors they cannot control (Eisenhardt 1989). The duration of the agent-principal relationship is particularly relevant for modern corporations where a short CEO career horizon often causes the CEO to display temporal myopia, a form of economic short-termism that entails excessive focus on the short-term implications of strategic decisions rather than on longterm growth (Gibbons and Murphy 1992). Prior studies have addressed CEO myopic loss aversion (Benartzi and Thaler 1995), its link to compensation structure (Guay 1999) and how it affects corporate decisions involving risk, such as acquisitions (Matta and Beamish * Jung Chul Park [email protected] Murad Antia [email protected] Christos Pantzalis [email protected] 1
Muma College of Business, BSN3403, University of South Florida, Tampa, FL 33620, USA
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2008). However, the literature has failed to thoroughly assess the implications of managerial temporal myopia regarding the agency costs of equity overvaluation (Jensen 2005; Jensen et al. 2004). It is conceivable that when their decision horizons become shorter, managers may be inclined towards actions that can destroy long-term value while boosting or maintaining stock prices at inflated levels in the short-term. For example, short-term overvaluation and the associated low cost of capital may motivate a tendency to overinvest (Blanchard et al. 1993; Polk and Sapienza 2009; Gilchrist et al. 2005). To better envision how economic short-termism can lead to unsustainable equity overvaluation, consider the asset side of a firm’s balance sheet which comprises assets in place (i.e., long-lived and short-lived assets that involve existing investments generating cash flows currently) and growth assets (i.e., assets whose expected value will be created by future inves
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