How do CEOs make investment decisions in their early years of tenure? Evidence from investment efficiency

Abstract

Career concerns are escalated during the early years of a CEO's tenure as the market is uncertain about the new CEO's ability. This study examines whether such increased career concerns induce investment inefficiency during the early years of a CEO's tenure in US firms. I find that underinvestment happens in the early years and that the underinvestment problem is most evident when the new CEO is externally appointed and has the low managerial ability. Additional analyses show that the underinvestment problems are more pronounced when firms have a high level of information asymmetry and low financial reporting quality.