An Investor Protection Issue: New Research Reveals Trends Among New and Established CEOs’ Performance and Spending Patterns
A paper recently issued by the National Bureau of Economic Research reveals several trends and explanations regarding how CEOs invest in new business lines. “CEO Investment Cycles” by Yihui Pan, Tracy Wang, and Michael Weisbach, all of Ohio State, finds that there is a CEO investment cycle dependent on CEO tenure.
The study shows that CEOs tend to invest less in the first three years of their tenure, during which time they actually divest their new company of assets and businesses–usually ones that were nonperforming or were mere pet projects of their predecessors. This changes after year 3, at which time CEOs, feeling more confident and having more influence over their boards, invest more and drive different business growth lines. They claim that “The estimated difference in investment rate between the first three years of a CEO’s tenure and subsequent years is approximately 6 to 8 percentage points, which is of the same order of magnitude as the differences caused by other factors known to affect investment, such as business cycles or financial constraints.”
What is truly interesting is that these trends hold regardless of CEO skill, prior experience, or demand or supply shocks.
The conclusion for investors? Internal governance of CEOs investment patterns could be as important as macro-economic issues.
The paper can be downloaded here, but please note it will cost you $5 to access it.