بررسی الگوی سرمایه گذاری حاشیه بازنشستگی مدیر عامل شرکت: شواهدی از انگلیس

The recent spate of corporate scandals worldwide has again raised serious concerns about the quality of corporate governance. We examine the governance effects on investment expenditure in the year of CEO retirement. Based on a sample of the 460 largest UK listed companies during 1990–1998, we find no evidence of changes in capital or research and development expenditure when CEOs are on the verge of retiring. In addition, neither board size nor leadership structure (separating the posts of CEO and chairman) influence corporate investment during the CEO's final year. However, we do show that there are some important governance effects. Cutbacks in fixed asset spending at the time of CEO departure are less likely in firms with executive-dominated boards. There is evidence that stock ownership of outside directors is associated with increased capital expenditure when the CEO retires. Finally, further analysis suggests that insider board monitoring and outsider equity ownership may act as substitute mechanisms in ensuring that retiring CEOs focus on value creating activities.

Is there a horizon effect when CEOs retire from their firms? We investigate this question by looking at the pattern of corporate investment when the CEO is on the verge of retiring. As a manager reaches retirement any incentives generated from career concerns within that firm can diminish or evaporate (Gibbons and Murphy, 1992b). A promotion prospect represents a valuable option to the manager, and when it is absent (the “no tomorrow” feature of the job separation), sub-optimal current behaviour and actions by the manager can ensue. Dechow and Sloan (1991) show that the prospect of weakening career concerns motivates CEOs to reduce investment in research and development (R&D), during their last year, in order to boost earnings and bonuses. In contrast, Murphy and Zimmerman (1993) investigate the behaviour of R&D, fixed capital, and advertising expenditures during the CEO's final year and find little support for horizon effects (i.e. that impending CEO departure affects economic variables). In our paper, we investigate whether such a horizon effect materializes when using British data. Such an exercise is worthy given the mixed evidence from prior studies. In addition to the direct effect of a CEO retirement on corporate investment we test whether the pattern of investment is different for firms with different governance structures. The design of certain “best practise” governance institutions—for the purposes of enhancing monitoring quality—may help assuage self-interested opportunistic behaviour by the manager. Our main contribution to the corporate governance literature is to empirically model the firm's investment decision and to identify whether or not there is a “horizon effect” in the data. In addition, we examine how the institutions of corporate governance interact with the CEO's retirement and affect the pattern of investment. Why does corporate governance interact with CEO retirement to alter the pattern of corporate investment? Here one can develop several predictions. The most obvious one is that effective boards are more likely to constrain investment manipulation surrounding CEO departure. Investment activity, at the time of CEO retirement, may, therefore, differ depending on the proportion of outside directors, board size and leadership structure (i.e. separating CEO and chairperson positions). Moreover, stock compensation might strengthen the directors’ incentives to effectively challenge opportunistic behaviour on the part of the departing CEO. Accordingly, cutbacks in investment expenditure at the time of CEO retirement may be less likely in firms with higher equity-based remuneration of directors. To provide evidence on all these issues, we collect data on a large sample of UK publicly quoted firms from 1990 to 1998. We then track CEO departures and record expected retirements. To investigate CEO discretionary behaviour, we model the firm's decision to invest on capital and R&D expenditure, conditional on proxies for board effectiveness and directors’ stock-based compensation. Our main empirical results may be summarised as follows. In our econometric models we find no evidence of changes in capital or R&D expenditure when CEOs are on the verge of retiring. Therefore, in line with prior US-based studies (e.g. Murphy and Zimmerman, 1993) the horizon effect is not empirically established when using British data.1 In addition to the direct horizon effect of CEO retirement on investment behaviour we also test for indirect effects via interaction terms with various governance variables. Here we find an important role for governance affecting the pattern of investment around CEO retirement. Specifically, we test whether investment patterns for retiring CEOs are different in companies with different leadership and board structures, as well as different equity ownership by board members. Once again, in our empirical analysis we do not find any evidence that board size or leadership structure (separating the posts of CEO and chairman) influence investment expenditure in the year of CEO retirement. Contrary to the view that outside board members are effective monitors, we find that cutbacks in fixed asset spending during the CEO's final year are less likely in firms with a strong presence of executive (i.e. inside), rather than outside, directors. We attribute this to the presence of low information asymmetry between executive directors and CEOs, which, in turn, enables the former to evaluate the CEO's investment choices effectively. Finally, we find that capital expenditure increases in firms where the CEO is retiring and the fraction of common equity owned by outsider directors is high. Equity ownership of executive board members does not seem to matter. There are no differences among capital expenditure patterns around the time of CEO departure for executives either with high or low ownership of common equity or stock options. We explain this by showing that stock-based compensation for executive directors of UK companies is relatively small whereas equity-based remuneration of outsiders, although not high in absolute terms, may still be an important component of their total compensation. Further analysis suggests that board monitoring (i.e. monitoring by executive directors) and stock-based incentives (i.e. stock ownership of outside directors) are substitute mechanisms to ensure that a CEO, who is on the verge of retiring, is motivated to focus on value creating activities. Empirical findings regarding the indirect effects of CEO retirement via interaction terms with governance variables are robust to several sensitivity tests, including the application of a different retirement period, the use of additional control variables (e.g. the type of new CEO appointment, prior firm performance) and, the introduction of industry-wide movements in fixed asset investment. Our paper contributes to the extant governance literature in the following ways. First, we test whether there is a horizon effect by investigating how the pattern of investment expenditure changes around the time of a CEO retirement. Our results complement prior US-based literature, whose evidence is inconclusive (e.g. Butler and Newman, 1982; Dechow and Sloan, 1991; Murphy and Zimmerman, 1993). Second, we examine how governance factors influence this process. Our findings on the incentive role of board stock compensation complement the results of Dechow and Sloan (1991) who find that investment reductions in the CEOs’ final year are mitigated by their shareholdings. Furthermore, we add to a growing literature, which examines the monitoring effectiveness of outside board members. In particular, Beasley (1996) and Dechow et al. (1996) demonstrate that US firms subject to fraud allegations and SEC Enforcement Actions are characterised by a lower proportion of outside board members. Similarly, Peasnell et al. (2000) and Klein (2002) present evidence consistent with lower accrual management being associated with a higher proportion of outside directors. We contribute to this literature by showing that in some cases, such as evaluating corporate investment strategy, outsiders are not necessarily the most effective monitors of CEO behaviour. Finally, our findings have implications for policy-makers and regulators, who in the wake of Enron and other high profile corporate scandals, have again become particularly concerned with efficient governance standards (for example, see, the Sarbanes–Oxley Act, enacted in the US in July 2002; the Higgs report recently released in the UK). Our results on the monitoring effectiveness of outside board members as well as on the incentive role of their stock compensation contribute to the debates on board structure and outsider remuneration. The remainder of the paper is organised as follows. The next section develops the motivation of the study. Section 3 describes the research design. Section 4 presents empirical results. Section 5 offers some conclusions.

This paper began with the question: is there a horizon effect when CEOs retire from their firms? We answered this by investigating the pattern of corporate investment when the CEO is on the verge of retiring. Our empirical results are based on a large panel data sample of British firms. We find no evidence that the pattern of investment is different in firms when their CEOs retire compared to firms whose CEOs do not retire. As such, we find no direct evidence of a horizon effect. This empirical finding is important since there are theoretical reasons to suppose that CEOs and managers might behave strategically as their retirement period approaches and reduce investment. Our paper shows, at least for the UK and this time period, that this does not happen, contributing thus to prior US-based studies, whose evidence is mixed. In addition, we examine the effect of CEO retirement on investment patterns in firms with different types of governance institutions. We find that cutbacks in capital expenditure at the time of CEO retirement are less likely in firms with a strong presence of executive directors. Moreover, our results show that investment reductions during the CEO's final year in office are less likely in firms with higher stock compensation of outside board members. However, equity stakes of executive directors are not large enough to encourage them to challenge the departing CEO effectively. Further analysis reveals that the positive effect of executive-dominated boards on the investment decisions of retired CEOs does not materialise in firms with high outsider stock ownership and vice versa, suggesting that insider board monitoring and outsider stock ownership are potentially alternative governance instruments. Findings on the interactions effects remain unchanged when performing various robustness checks. Our analysis is subject to some limitations. First, it is documented in the accounting literature that incoming CEOs undertake large earnings baths through asset write-offs (e.g. sell-off unprofitable divisions) and then increase investment in new assets with accelerated depreciation (Pourciau, 1993). If there is a hint of earnings management undertaken by the incoming CEO in the year of turnover then the findings in the study will be biased. However, the investment variable we employ measures total purchases of new fixed assets and not capital expenditure net-off disposals. Secondly, incoming CEOs may wish to engage in such a discretionary behaviour to blame the old CEO for past “mistakes” (the firm's poor performance) and put themselves in the best light for the coming years (Godfrey et al., 2003). This, however, is less likely in the case of expected retirements, where the turnover process is amicable and unrelated to firm performance (e.g. Conyon and Florou, 2002); and the incumbent CEO participates, directly or indirectly, in the selection process of the incoming CEO (e.g. Vancil, 1987). Overall, our study contributes to the on-going debate on the appropriate composition of the board. Corporate governance reports worldwide recommend, or even require, that boards be comprised of a majority of outside, independent directors. Our findings, however, suggest that outsiders may not always be the most efficient “policemen” of CEOs. This may be particularly true in the case of evaluating and approving a CEO's investment choices where existing information asymmetries between the latter and the board's outside members can be significant. The results also have implications for the incentive compensation of outside directors. There is some evidence that increased equity stakes by outsiders may encourage them to successfully perform their monitoring duties. The issue of stock-based compensation for outsiders is a very controversial one. On one hand, many outside directors themselves feel that the risk/reward ratio is out of balance and that the proportionality with executive pay has been lost. Alternatively, the various reasons against stock compensation can be summed up as compromising outsider independence. Our findings, therefore, may shed some light on this controversy.