Constraints and incentives for making long horizon corporate investments

Article Type: Abstracts From: Strategic Direction, Volume 27, Issue 3

Souder D. and , Shaver J.M. Strategic Management Journal, December 2010, Vol. 31 No. 12, Start page: 1316, No. of pages: 21

This paper examines the conditions under which firms make long horizon investments (i.e. investments that take a long period of time to pay off). We predict firms are constrained from making long horizon investments when short-term performance is poor – and this effect is especially pronounced for young firms. Moreover, we argue that when managers hold high levels of exercisable stock options, their firms are less likely to make long-term investments. However, firms are more likely to pursue long horizon investments when managerial stock options are not yet exercisable. Based on analysis of investments made by cable television operators from 1972 to 1996, we find support for these predictions. In addition to enhancing our understanding of investment choices, these results – derived from the temporally focused analysis of an investment’s payoff horizon – suggest that payoff horizon is an important investment attribute in its own right and should be analyzed distinctly from and in addition to other aspects of investments, such as expected return and risk.Article type: Research paper ISSN: 0143-2095 Reference: 39BB595

Keywords: Corporate investments, Payoff horizon, Risk