Investor Myopia and CEO Horizon Incentives

We examine horizon incentives, features of compensation contracts that influence the decision horizon of managers, and shed light on the role of investor horizon on the design of such incentives. Using new measures of horizon incentives that consider the vesting of equity payments, we focus on a setting where some controlling shareholders have the ability and motivation to influence contract design. Specifically, using a sample of IPO firms we contrast horizon incentives provided to CEOs in firms held by venture capitalists (VCs) with horizon incentives provided to CEOs in non VC-backed firms. VCs have significant ownership and control of the firm and typically have short-horizons subsequent to the IPO. Consistent with investor horizon influencing horizon incentives, we find that VC-backed firms provide compensation contracts with short-horizon incentives that correspond with the anticipated exit of the VC. However, we find that market monitoring through the presence of institutional investors mitigates such short-horizon incentives. Our results are robust to endogenously determined VC financing. We also find that long-run abnormal stock returns are lower for firms in which managers have short-horizon incentives, consistent with these managers sacrificing long-run value to protect prices in the short-run.