Pressured to Perform: Evidence from a Quasi-Experiment of Initial CEO Contract Length and M&As

Abstract

This paper examines whether CEOs with shorter initial contract lengths suffer from greater pressure and consequently engage in more visible efforts via mergers and acquisitions (M&As). By using CEO initial fixed-term contracts and exploiting U.K. corporate governance reform as an exogenous shock, we find that (1) CEOs with shorter initial contract lengths engage in more (and salient) M&As with relatively weaker market reactions; (2) the likelihood of contract renewal is higher among CEOs who engage in more visible efforts, while long-term performance still matters the most; and (3) firms with better corporate governance are more vigilant to visible efforts.