CEO Investment Cycles

Yihui Pan, Tracy Yue Wang and Michael Weisbach

No 19330, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper documents the existence of a CEO Investment Cycle, in which firms disinvest early in a CEO's tenure and increase investment subsequently, leading to "cyclical" firm growth in assets as well as in employment over CEO tenure. The CEO investment cycle occurs for both firings and non-performance related CEO turnovers, and for CEOs with different relationships with the firm prior to becoming CEO. The magnitude of the CEO cycle is substantial: The estimated difference in investment rate between the first three years of a CEO's tenure and subsequent years is approximately 6 to 8 percentage points, which is of the same order of magnitude as the differences caused by other factors known to affect investment, such as business cycles or financial constraints. We present a variety of tests suggesting that this investment cycle is best explained by a combination of agency-based theories: Early in his tenure the CEO disinvests poorly performing assets that his predecessor established and was unwilling to give up on. Subsequently, the CEO overinvests when he gains more control over his board. There is no evidence that the investment cycles occur because of shifting CEO skill or productivity shocks. Overall, the results imply that public corporations' investments deviate substantially from the first-best, and that governance-related factors internal to the firm are as important as economy-wide factors in explaining firms' investments.

JEL-codes: G32 G34 M12 M51 (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-bec
Note: AP CF
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Citations: View citations in EconPapers (4)

Published as Yihui Pan & Tracy Yue Wang & Michael S. Weisbach, 2016. "CEO Investment Cycles," Review of Financial Studies, Society for Financial Studies, vol. 29(11), pages 2955-2999.

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Related works:
Journal Article: CEO Investment Cycles (2016)
Working Paper: CEO Investment Cycles (2013)
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