Short‐Termist CEO Compensation in Speculative Markets: A Controlled Experiment*

Abstract

Bolton, Scheinkman, and Xiong (2006) model a setting where investors disagree and short‐sales constraints cause pessimistic views of stock prices to be less influential, which leads to speculative stock prices. A theoretical implication of the model is that existing shareholders can exploit the speculative stock prices by (i) designing managerial compensation contracts that encourage short‐term performance, and (ii) subsequently selling their shares to more optimistic investors. We document empirical support for this theory by finding that an exogenous removal (Regulation SHO) of short‐sales constraints curbs the provision of short‐term incentives, an effect reflected in longer CEO compensation duration. The effect is concentrated among stocks with high investor disagreement and short‐term‐oriented institutional ownership. Consistent with prior work, we also find that longer CEO compensation duration leads to longer CEO investment horizons, less overinvestment, and less earnings management. Collectively, our results speak to the contributing role of speculative stock prices in corporate short‐termism. Finally, our study implies that effective policies to curb corporate short‐termism should address stock market speculation and promote mechanisms that tie executive compensation to longer‐term stock price performance.

Chief Executive Officer (CEO) and corporate environmental sustainability: A systematic literature review and avenues for future research

“…In this SLR, we focus on the relationship between CEOs and environmental sustainability, guided by the principles of clarifying and improving existing definitions (Fatima & Elbanna, 2023). CEO attributes have been recognized as crucial in shaping firm outcomes, including performance (Abernethy et al, 2019; Dikolli et al, 2018; Nienhaus, 2022; Saleh et al, 2020), compensation (Chang et al, 2021; Powers et al, 2016), disclosure (Ernawan & Daniel, 2019; Liu & Nguyen, 2020), earnings management (Alhmood et al, 2020; Bouaziz et al, 2020) and risk‐taking (Campbell et al, 2019; Farag & Mallin, 2018). However, the link between CEO characteristics and environmental sustainability has received relatively limited attention in the academic literature (Arena et al, 2018).…”

Short selling and readability in financial disclosures: A controlled experiment

“…(2016) document that short‐selling activities reduce earnings management. Using Regulation SHO, others link short selling with corporate innovation (He et al., 2023), the design of executive incentive contracts (De Angelis et al., 2017), corporate social responsibility (Gao et al., 2022), and bad news management forecasts and 10‐K readability (Li & Zhang, 2015), workplace safety (Bai et al., 2020), stock price crash risk (Deng et al., 2020), audit fees (Hope et al., 2017), Bad news disclosure (Clinch et al., 2019), price informativeness during and after earnings announcement (Clinch & Li, 2022), real earnings management (Cai et al., 2023), corporate short‐termism (Chang et al., 2021), long‐run management forecasts (Chen et al., 2020), and insiders’ opportunistic trading (Wang et al., 2022).…”

Short seller monitoring and real earnings management

“…According to these studies, short‐selling threats curb accruals‐based earnings management (Fang et al., 2016; Massa et al., 2015), constrain aggressive non‐GAAP reporting (Bhattacharya et al., 2022), enhance acquisition performance (Chang et al., 2019), and increase the likelihood of forced CEO turnover (Bennett & Wang, 2018). Studies in this category also examine how the RegSHO pilot program affects other aspects of managers’ decisions, such as those regarding corporate financial policies (e.g., Chen et al., 2019; Francis et al., 2017; Gong, 2020; Grullon et al., 2015; Wang, 2018), internal capital allocation (Albertus et al., 2019), corporate innovation (He & Tian, 2016), labor relations (Brockman et al., 2020), tax aggressiveness (Kim et al., 2020; Maharjan et al., 2020), insider trading (Massa et al., 2015; Wang et al., 2022), executive compensation (Chang et al., 2021; De Angelis et al., 2017; Lin et al., 2019), and management forecast and disclosure (Clinch et al., 2019; Francis et al., 2017; Kubick et al., 2021; Li & Zhang, 2015; Sun & Xu, 2022).…”