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Keywords:

  • investment policy;
  • behavioral theory;
  • CEO incentives;
  • temporal orientation;
  • short-termism

Abstract

In contrast to broad generalizations about the short-termism of managers, this paper explains changes in the temporal orientation of specific firms over time based on performance relative to aspirations and top management team incentives. We gain empirical traction on temporal orientation by measuring the durability of acquired property, plant, and equipment (asset durability) from reported data on depreciation expense. Consistent with predictions, we find that performance relative to aspirations positively influences asset durability. Surprisingly, we find no evidence that stock-based compensation produces the same effect. Instead, we find stock-based compensation lowers asset durability. Copyright © 2011 John Wiley & Sons, Ltd.