Short-Horizon Incentives and Stock Price Inflation

Authors

Jianxin Daniel Chi, University of Nevada, Las VegasFollow
Manu Gupta, Virginia Commonwealth UniversityFollow
Shane A. Johnson, Texas A&M UniversityFollow

Document Type

Article

Publication Date

8-21-2019

Publication Title

Journal of Corporate Finance

First page number:

1

Last page number:

19

Abstract

Do managerial incentive horizons have capital market consequences? We find that they do when short-sale constraints are more binding. Firms experience significant stock price inflation when their CEOs have short horizon incentives. The short-horizon CEOs sell more shares at inflated prices and generate greater abnormal trading profits. The stock price inflation is partly explained by greater earnings surprises and more positive investor reaction to the surprises. To inflate stock prices, short-horizon firms are more likely to employ income-increasing discretionary accruals. Consistent with theoretical predictions, all these effects are attenuated or statistically insignificant when short-sale constraints are less binding.

Keywords

Executive compensation; Incentives; Stock returns; Insider trading; Earning management

Disciplines

Corporate Finance | Portfolio and Security Analysis

Language

English

Repository Citation

Chi, J. D., Gupta, M., Johnson, S. A. (2019). Short-Horizon Incentives and Stock Price Inflation. Journal of Corporate Finance 1-19.
http://dx.doi.org/10.1016/j.jcorpfin.2019.101501