Can compensation committees effectively mitigate the CEO horizon problem? The role of co-opted directors

ORCiD

Ruonan Liu: 0000-0002-1197-1780

Document Type

Article

Publication Title

Accounting Research Journal

ISSN

1030-9616

Volume

34

Issue

1

DOI

10.1108/ARJ-11-2019-0213

First Page

1

Last Page

21

Publication Date

2-8-2021

Abstract

Purpose: This study aims to examine whether compensation committees dominated by co-opted directors are less effective in mitigating the CEO horizon problem.

Design/methodology/approach: The author uses a sample of 7,280 firm-year observations from 1998 to 2011.

Findings: In this study, the author finds evidence of opportunistic research and development (R&D) reduction and accruals management in firms with retiring CEOs and compensation committees dominated by co-opted directors. Moreover, it is found that R&D reduction and income-increasing accruals are less discouraged when determining the compensation for retiring CEOs by compensation committees that are dominated by co-opted directors. The results suggest that compensation committees dominated by co-opted directors are less effective in adjusting CEO compensation to mitigate the CEO horizon problem.

Originality/value : The study reveals that co-opted directors are weak monitors. Moreover, the study adds empirical evidence to the debate of organizations’ CEO horizon problem. Finally, the study adds to the literature on corporate governance, revealing that compensation committees play an important role in mitigating an organization’s CEO horizon problem by adjusting CEO compensation.

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