Do managers act opportunistically towards the end of their career?

Abstract

As managers approach retirement, their career horizons become shorter and they might start to behave opportunistically by taking a more risk-averse and short-term orientation. Long-term risky investments, such as research and development, can suffer the most from this problem as their payoff comes long after CEOs retire. To mitigate such behavior, most executive compensation contracts include long-term performance incentives. In this study, we hypothesize that long-term debt-like compensation in the form of defined benefit pension can make the career horizon problem more severe. We empirically examine the impact of managerial opportunism, influenced by pension compensation, on the research and development investments. We find that on average UK CEOs do not curtail research and development as their career horizons become shorter. But, the defined-benefit pension component of executive compensation leads CEOs, who are closer to retirement, to decrease R&D investments. Our results imply that executive compensation contracts need to be appropriately adjusted when managers approach retirement.

Do CEO characteristics matter for corporate risk taking? Evidence from Russia

“…The initial upward slope is consistent with Xie (2015), who finds a positive relation between CEO tenure and corporate risk-taking. It is also consistent with Kabir et al (2018), according to whom CEOs do not curtail certain high-risk activities such as R&D investments as their career horizons become shorter. In contrast, the negative relationship may be a result of increasing career concerns, less diversification of CEOs' personal capital and the less overconfidence of experienced managers.…”

Inside debt and firm risk‐taking: Evidence from the UK pension reform

“…Third, previous literature also employs the same risk implications for UK studies. For instance, Kabir, Li, and Veld‐Merkoulova, 2013, 2018) find that CEO DB pension provides risk‐averse incentives in the UK, which is consistent with the US literature.…”

“…It captures the relative incentives of inside debt compared to equity pay. The last inside debt variable is the relative ratio of DB pension to equity incentives based on firms’ debt‐to‐equity ratio (Kabir et al., 2013, 2018; Liu et al., 2014). It captures the trade‐off between a CEO's personal leverage and his or her firm leverage.…”

“…In more recent studies, the effect of inside debt on risk‐taking is documented as conditional. Kabir, Li, and Veld‐Merkoulova (2018) show that CEOs cut R&D spending if they have more DB pensions and shorter career horizons. Li, Lin, Sun, and Tucker (2018) provide evidence that the relationship between inside debt and corporate conservatism is mostly for non‐investment grade firms.…”

“…Following Kabir et al. (2013, 2018), we use hand‐collected data from annual reports to estimate the CEO DB pension value. An example of the estimation based on the company's annual report is provided in Appendix B.…”