Do CEO Implicit Incentives Affect Strategic Effort Reduction? Evidence from CEO Origin and Career Horizon

ABSTRACT This study examines the effects of implicit incentives related to CEO origin and career horizon on strategic effort reduction. Analyzing data on the actual performance and targets of S&P 1,500 firms from 2012 to 2020, this study shows that the degree of the ratchet effect is (1) less pronounced for externally recruited CEOs compared to internally promoted CEOs and (2) lower for CEOs with shorter career horizons compared to those with longer career horizons. Additional analyses indicate that the ratchet effect is more pronounced when a higher relative incentive weight is assigned to earnings per share (EPS) targets. This study contributes to the existing target-setting literature by identifying potential factors influencing the ratchet effect. JEL Classifications: J33; M12; M40.