The pattern of investment surrounding CEO retirements: UK evidence

The recent spate of corporate scandals worldwide has again raised serious concerns about the quality of corporate governance. We examine the governance effects on investment expenditure in the year of CEO retirement. Based on a sample of the 460 largest UK listed companies during 1990–1998, we find no evidence of changes in capital or research and development expenditure when CEOs are on the verge of retiring. In addition, neither board size nor leadership structure (separating the posts of CEO and chairman) influence corporate investment during the CEO's final year. However, we do show that there are some important governance effects. Cutbacks in fixed asset spending at the time of CEO departure are less likely in firms with executive-dominated boards. There is evidence that stock ownership of outside directors is associated with increased capital expenditure when the CEO retires. Finally, further analysis suggests that insider board monitoring and outsider equity ownership may act as substitute mechanisms in ensuring that retiring CEOs focus on value creating activities.