Management Accounting Section Midyear Meeting

How Do CEOs Make Investment Decisions in Their Early Years of Tenure? Evidence from Investment Efficiency

• In Event: Break/Research Exhibition 3: Interfirm Issues and Governance

Abstract

Prior studies show that career concerns can escalate during the early years of a CEO’s tenure. During that time, the information asymmetry problem is intense due to the market’s uncertainty about the new CEO’s ability and the compatibility between his or her skills and the firm’s strategic needs. This study examines whether increased career concerns and information asymmetry induce investment inefficiency during the early years of a CEO’s tenure. I find that underinvestment is more likely to happen in the early years than in the later years, and that the underinvestment problem is most evident when the CEO is externally appointed, holds an interim position, and has low managerial ability, and when the firm has a higher level of information asymmetry and lower financial reporting quality. I also find that firms are less likely to issue debts during those early years, which suggests that a reduced supply of capital can contribute to the underinvestment phenomenon in the early years of a CEO’s tenure. Together, these findings indicate that during the early years of a CEO’s service, especially in contexts where career concerns are high and the information environment is more asymmetric, investment inefficiency is more likely to occur.

Author

• Huiqi Gan, University of Massachusetts-Lowell