CEO Short-Termism Can Enhance Product Market Collusion
29 Pages Posted: 31 Oct 2014 Last revised: 16 Jan 2016
Date Written: October 29, 2014
Abstract
We uncover a particular channel how short-term CEO employment contracts affect fi rm behavior in product markets and thus the firm value. Our theoretical model hinges on the trade-off between CEOs maximization of shareholder value and her interest to meet profi t targets that result in re-employment. Such tension affects CEOs timing of defection from the cartel, and thus its stability. These theoretical predictions are motivated by empirical observations that the start of judicial investigation against a cartel primarily affect the fi rms with long-term CEOs.
Keywords: collusion, short-termism, corporate governance, contract duration
JEL Classification: G34, G38, L22
Suggested Citation: Suggested Citation