Myopic Corporate Behaviour and CEO Quality

Andrew Dickerson, Christopher J. Ellis and John Peirson

Studies in Economics from School of Economics, University of Kent

Abstract: We develop and test a simple asymmetric information model of CEO quality, in which CEOs know their quality and shareholders may only infer this from observations of corporate profits. CEOs signal their quality to shareholders by manipulating the time path of corporate profits. Though shareholders act optimally, this signalling is inefficient and produces the features of managerial myopia. When there is a pooling equilibrium, this inefficiency may be reduced by the provision to CEOs of Golden Parachutes or long term contracts. When there is a separating equilibrium these measures may not be used to increase efficiency. The assumptions and predictions of the model are validated by comparison with existing evidence and tested against American data on company performance and CEO turnover.

Keywords: Managerial Myopia; Short-Termism; CEO Turnover; Corporate Performance; Signalling (search for similar items in EconPapers)
JEL-codes: G30 G31 J33 (search for similar items in EconPapers)
Date: 1996-07
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Persistent link: https://EconPapers.repec.org/RePEc:ukc:ukcedp:9611

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