Short‐Termist CEO\n Compensation in Speculative Markets: A Controlled Experiment*

Abstract

We find an exogenous removal of short-sale constraints curbs CEO short-termism as measured by longer compensation duration. This is consistent with the agency model of Bolton, Scheinkman, and Xiong (2006) where optimal compensation contracts emphasize short-term performance when stock prices include a speculative component due to investor disagreement and short-sale constraints. Further supporting evidence shows that the compensation duration effect is concentrated among firms with high market disagreement, high asymmetric information, and low analyst coverage. Firms with no short-sale constraint also exhibit less overinvestment and earnings management.