Institutional investors, Heterogeneity, Preference, Executive compensation, Pay-performance sensitivity, G32, G34,

A B S T R A C TThis paper presents a systematic analysis of the effect of CEO tenure on risk-taking. We document an overall positive effect of tenure on risk-taking, which is inconsistent with a view of tenure as primarily an indicator of human capital investment. Although we cannot rule out the explanations of risk-taking based on the power and experience effects of tenure, our results are more consistent with interpreting tenure as an indicator of the career concerns of a manager. Consistent with this interpretation and recent theoretical work, we show that the effect of CEO tenure on risk-taking depends on the information asymmetry about CEO ability.

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We conduct the first systematic analysis of the effect of CEO tenure on risk-taking. We document an overall positive impact of CEO tenure on risk-taking. Our results suggest that this positive relation may not be explained by tenure proxying for power, experiences, or human capital investment. Instead, the results are consistent with the hypothesis that the declining career concerns associated with longer tenure increase the risk-taking incentive of a CEO. Further, the evidence suggests that the effect of career concerns on risk-taking depends on the degree of information asymmetry about CEO ability, which is consistent with recent theoretical work.

Purpose -The paper aims to study the effect of tenure on the structure of CEO compensation. The relation between CEO compensation and CEO tenure provides a good testing bed for many effects: the managerial power effect, the portfolio consideration effect, the learning effect, and the career concern effect. Design/methodology/approach -Tobit regressions were run of the percentage of equity-based compensation on CEO tenure and the effect of tenure compared between inside CEOs and outside CEOs. Findings -It was found that the percentage of equity-based compensation increases during the early years of tenure for outside CEOs, and decreases during the later years of tenure for inside CEOs. Before they are tenured, outside CEOs have significantly higher and faster growing percentage of equity-based compensation than inside CEOs. Furthermore, the portfolio consideration effect and the learning effect are the major effects in explaining the effect of tenure on the compensation structure. Practical implications -The evidence that boards of directors take into account the CEOs' holdings of equity incentives, the types of CEOs, and their years on tenure to adjust the structure of CEO compensation indicates that firms should, and do, try to optimize their CEO compensation structure on the basis of firm-specific or CEO-specific characteristics. It is suggested that there is no simple formulaic approach to governance reform. Originality/value -The paper contributes to the literature by studying and explaining the different patterns of compensation structure over CEO tenure between inside CEOs and outside CEOs.