CEO Decision Horizon Towards Company’s Performance
Fitri Ismiyanti
1
, Putu Anom Mahadwartha
2
and Andita Jaufatul Laili
3
1
Faculty of Economics and Business, Airlangga University, Indonesia
2
Faculty of Business and Economics, Surabaya University, Indonesia
3
PT Waskita Beton Precast Tbk, Indonesia
Keywords: CEO Decision Horizon, Leverage, Size, Operating Profit Margin, Tobin’s Q.
Abstract: This research aims to analyze the influence of CEO decision horizon, leverage, size, and operating profit
margin on the firm’s performance using manufacturing company listed in Indonesian Stock Exchange over
the period 2012-2016. This research used regression method to test the hypothesis. Firm’s performance is
measured by Tobin’s Q as the dependent variable and CEO decision horizon, leverage, size, and operating
profit margin as the independent variable. The results showed that CEO decision horizon affected by
Tobin’s Q. Leverage has positive effect to Tobin’s Q. Size has positive significant effect to Tobin’s Q, and
operating profit margin has positive insignificant effect to Tobin’s Q using 5% level of significance. Higher
CEO decision horizon will increase firm performance because their experience of managing firm useful and
beneficial for shareholder wealth.
1 INTRODUCTION
CEO (Chief Executive Officer) or president director
is the highest executive in a board of director who
held important role as a decision maker in a
company to achieve company’s main goal, which is
increasing company’s value. CEO decision horizon
defined as a time period of CEO effectivity on their
decision-making process that measured by expected
tenure (Jensen and Smith, 1985). Expected tenure
determined by 2 factors, they are longevity and
CEO’s age. CEO with a short decision horizon
linked with bad company’s performances (Antia,
2010) and cause an agencies conflict to surface.
Short CEO decision horizon will cause pressure to
increase company’s performance before the end of
the period, one of them is by investing on a short-
term with a high-risk project, ignoring the mild risk
project. This kind of condition’s calls managerial
myopia.
Study that has been done by Antia (2010) shows
that CEO decision horizon affects company’s
performance. The effects of CEO decision horizon
towards company’s performance is an interesting top
in to analyze, especially in electing the new CEO for
a company. Even though there’s already many
studies about the effects of longevity or CEO’S age
towards company’s performance, so far, it’s still
very hard to find study regarding CEO decision
horizon in Indonesia.
2 LITERATURE REVIEW
Based on Jensen and Smith (1985) opinion, CEO
decision horizon defined as a period of time that
CEO have to produce decision that restricted by 2
things, which are longetivity and CEO’s age (Antia,
2010). From Jensen and Meckling study (1979),
CEO decision horizon measure by expected tenure.
Value of decision horizon result of expected tenure
calculation could be positive or negative. Decision
horizon is positive if expected tenure of company’s
CEO in longer than median expected tenure of CEO
in a industry. This caused by CEO who just got
officiate. On the contrary, decision horizon is
negative if CEO’s expected tenure is shorter than
CEO’s median expected tenure in industry which
caused by CEO’s old age or has been officiate for a
long time.
Based on Zahara and Pearce (1989) company’s
performance determine company’s ability to produce
earnings on a certain period. The measurement of
company’s performance done by doing Tobin’s Q
mehod which defined as a company’s market value
aset ratio towards company’s asset replacement cost
400
Ismiyanti, F., Mahadwartha, P. and Laili, A.
CEO Decision Horizon Towards Company’s Performance.
In Proceedings of the 1st International Conference on Islamic Economics, Business, and Philanthropy (ICIEBP 2017) - Transforming Islamic Economy and Societies, pages 400-403
ISBN: 978-989-758-315-5
Copyright © 2018 by SCITEPRESS – Science and Technology Publications, Lda. All rights reserved

(Tobin, 1969). The value of Tobin’s Q is more than
1 if the company’s value is higher than the book
balue (overvalued). Lidenberg and Ross (1981)
states that Tobin’s Q high ratio shows that company
have good investation chance, and a significance
competitive advantages.
Agency theory states that agencies relationship
surface when one or more people (principal)
delegating their rights of decision making to other
people (Jensen and Meckling, 1976), which caused a
different interest. In a company, stockholders main
concern is the return from the funds have invested,
while manager’s interest is incentive earned by
managing stockholder’s fund.
Jensen and Mecking (1976) stated that the
reason behind different interest between manager
and stockholders is because manager didn’t have to
be responsible for the risk caused by a mistake in
business decision. Whereas based on Jensen and
Smith (1985), conflicts between manager and
stockholder caused by: 1) manager’s attempt in
managing the company; 2) manager’s inability to
diversificates risks; 3) horizon problem existence.
Myopic behavior based on Porter (1992) is
“sacrificing long-term growth for the purpose of
meeting short-term goals”. This definition have 3
aspects: (1) there’s an underinvestment in creating
long-term value; (2) underinvestment happened to
fulfill short-terms goal; and (3) underinvestment
makes long term growth and value creation weaker.
One of the reasons why manager prefers short-
term project based on Campbell and Marino (1994),
is to support their reputation in managerial labor
market. While Hirshleifer and Thakor (1992), said
that this because manager didn’t want to take risk.
Stein (1988) says that myopic CEO have incentive
to focus on a short-term goal so they can increase
company’s current stock price faster. This argument
supported by Laverty (2004), which stated that
company with myopia managerial have correlations
with high investment return.
Long CEO decision horizon indicates that CEO
have short longetivity. Antia (2010) states that long
decision horizon will create an enviromental that
push CEO to focus on the stockholder’s long-term
needs where needs fulfillment of stockholder’s
needs will increase that company’s value.
Long decision horizon also made company’s
strategy implementation more effective (Antia,
2010) and made CEO have a better market
evaluation (Jensen and Meckling, 1979). CEO who
pays attention to stockholder’s well being will take
decision that minimize agencies conflict to happen
so they could increase company’s value.
On the other side, short decision horizon push
myopia managerial to happen. This is an
understanable responds regaring CEO’S pressure to
increase company’s performance in a short term
before thair time as CEO ends. As a result, company
experienced unedrinvestment because of a few
potential long term projects missed (Brickley, 1999).
H
1
: CEO Decision Horizon have positive affect
to company’s performance.
Leverage defined as a company’s ability to use
activa as a tools to increase return. Based on
Modigliani and Miller (1958) in a condition where
there’s income tax, leverage can increase company’s
value. Increase of company’s vaue happened
because interest downpayment can decrease tax. But
the excessive use of debt can lead company’s value
to decreased, which caused by tax savings that
increase only a little of company’s value compared
to the cost of bankcruptcy which decrease
company’s value. Therefore, a company have to set
an optimum capital structure to maximize
company’s value.
H
2
: Leverage have positive affect to company’s
performance.
Company’s size is how big or small a company
is, measured by total assets. Based on Bantel and
Jackson (1989) opinion, a big company also have a
big access so it helps company’s performance
development. A big company also linked with
market power (Shepherd, 1986) where an efficient
market power will increase company’s performance.
H
3
: Size have positive affect to company’s
performance.
Operating profit margin is a profitability ratio
which measures company’s ability to produce
earning before interest and tax. OPM has a positive
effects on company’s performance, because a high
OPM will give positove perspective towards
company’s performance.
H
4
: Operating profit margin have positive affect
to company’s performance
Research model to find out about the CEO
decision Horizon effects along with leverage,
company size, and operating profit margin towards
company’s performance formulated as :
CEO Decision Horizon Towards Company’s Performance
401

= company’s performance i on t
period
= company’s CEO decision horison
= company’s size i on t period
= company’s leverage i on t period
= company’s operating profit margin.
3 RESEARCH METHOD
Sample used for this study in manufacturer company
listed on Indonesian stock exchange from 2011-2015
period. Source and type of data used in secondary
data from company’s annualy financial statements.
To give an idea of the variables used in this
study, the operational definition of each variable is
described as follows:
1. CEO Decision Horizon proxied with expected
tenure. Variable measurements done by using
formula below:
2. Leverage calculated by:
=
3. Company size calculated by:
=
4. Operating Profit Margin (OPM) calculated by:
5. Company’s performance (TOBINS’Q)
calculated by :
4 RESULTS AND DISCUSSION
Testing using double regression linear with
significance level 5%. The result of the test in Table
4.1 shows that CEO horizon decision variable.
Company’s size, and Operating Profit Margin
positively affects company’s performance. While
leverage variable didn’t have any effects on
company’s performance.
Table 1: Regression result.
Independent
Variable
Regression
Coefficinet
Std.
Error
t-
Statistic
Sig.
(Constant)
-1,851
0,822
-4,161
0,027
DH
0,008
0,023
2,402
0,017
LEV
-0,016
0,230
-0,095
0,648
SIZE
0,096
0,059
3,367
0,005
OPM
2,740
0,555
5,689
0,000
Std. Error of the Estimate
0,56328
R Square
0,314
F – Statistic
13,272
Sig. F
0,000
The result of this study shows that CEO decision
horizon (DH) positively and significantly affects
company’s performance. Long CEO decision
horizon will minimize agencies conflict between
manager and stockholders because of stockholder’s
fulfillment needs considered as a way to increases
company’s performance rapidly. When CEO
prioritize stockholder then stockholder’s trust will
increase so the company’s value will also increase.
Long CEO horizon also dodge company from CEO
longetivity negative effects, like decreased in CEO’s
information access from external party, and on a
work challenge. While short CEO decision horizon
encourage managerial myopia happens on CEO.
Myopic CEO focused more imto short term goals
and increases in profit with taking a short term
projects with high return. As a result, company will
experience underinvestment because many of
potential long term project didn’t get chosen and
will decreased earnings and company’s value
(Gibbson and Murphy, 1982).
From the result of this study, leverage don’t have
significance effects on company’s performance. This
happen because not every investor or stockholdelrs
in indonesia is a rational type who considers
financial information, including leverage, in giving
views towards company’s value. The existence of
investor with intuitive and emotional type cause
leverage effects towards company become biased.
Other than that, high or low leverage or big or small
the debt is, isn’t being a main concern by investor
because company put their concerns more on how
company use their fundings effectively and
ICIEBP 2017 - 1st International Conference on Islamic Economics, Business and Philanthropy
402

efficiently to achiever company’s value (Bonn,
2004).
Regression test result shows that company size
positively nd significantly affects company’s
performance. This happened because big company
have a better ability to optimize their resoirces so it
could help company increases their performance
compared to small company. Big company also have
better access towards cost of capital and also having
more stable cash flows which allows big company to
produce better financial performance, and will
increase stock proce which reflects company’s
value.
Based on regression test, operating profit margin
have a posotive effect towars company’s
performance. This happens because company that
hase great performance generally produce big profit
because of efficient company’s performance.
Furthermore, high operating profit margin value also
give positive perspectives towards company’s value.
This result is compatible with the hypothesis which
stated that OPM positively affects company’s
performance.
5 CONCLUSIONS
This research concluded that CEO decision horizon
(DH) affects company’s performance. Long horizon
of CEO decision will decrease agency conflict
between manager and stockholders. Satisfying
stockholder’s needs considered as a way to increases
company’s performance. While short horizon CEO
decision will support managerial myopic behavior.
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