Determinants of CEO Investment Horizon. A Literature Review

Abstract

This paper conducts a comprehensive literature review of the factors influencing the emergence of the CEO investment horizon problem – a preference for short-term investments over long-term ones. The root cause of this CEO issue, as in-dicated in existing literature, is often attributed to the CEO's personal risk attitude, shaped by factors like age, tenure, and cultural background.
Numerous sources contributing to the short-term investment problem in public companies are described in the current academic literature. Prominent among these determinants are the challenges of quarterly reporting, the association of corporate performance with short-term metrics, market pressures, and the company's specific risk profile. A study by McKinsey & Company, focused on the short horizon problem, demonstrates that companies inclined toward short-term investments exhibit weaker fundamentals and performance. The consulting firm Ernst & Young has introduced the Long-term Orientation Index, offering a basis for cross-country comparison of decision horizons. In 2010, Antia and colleagues introduced a metric for measuring CEO decision horizons, which relies on CEO personal characteristics. Despite these efforts, a comprehensive literature review addressing the specificity of the CEO investment horizon problem and its dis-tinctions from the broader corporate investment horizon problem has been absent.
This paper not only investigates the initial empirical exploration of the short investment horizon problem but also raises questions about its cross-country manifestations, its potential correlation with economic crises, and the relevant personal traits of CEOs for its study. Finally, the paper proposes various strategies to mitigate the CEO investment horizon problem within companies.