Institutional Investment Horizons and CEO Compensation

Abstract

I investigate the relation between the structure of CEO compensation and

the investment horizons of a firms institutional investors and find results

consistent with the assertion that short-sighted institutions focus on shortterm

earnings leads firms to grant more options with higher sensitivity to

stock price. In contrast, the percentage holdings of long-term investors are

negatively correlated with the use of options and the sensitivity of total CEO

equity incentives to changes in stock price. Further results suggest that

firms with higher short-term institutional ownership are more concerned

about a negative earnings surprise and that when determining annual

bonuses, they punish their CEOs more severely. In total, the analyses

provide evidence that the investment horizon of institutional investors is

associated with firms CEO compensation policies.