Abstract

http://ssrn.com/abstract=2270027
 


 



Equity Vesting and Managerial Myopia


Alex Edmans


London Business School - Institute of Finance and Accounting; University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Vivian W. Fang


University of Minnesota - Twin Cities - Department of Accounting

Katharina Lewellen


Dartmouth College - Tuck School of Business

March 31, 2014

ECGI - Finance Working Paper No. 379/2013

Abstract:     
This paper links the impending vesting of CEO equity to reductions in real investment. Existing studies measure the manager’s short-term concerns using the sensitivity of his total equity to the stock price. However, in myopia theories, the driver of short-termism is not the CEO’s overall incentives, but his incentives to increase the short-term stock price in particular. We use recent changes in compensation disclosure to introduce a new empirical measure that is tightly linked to theory - the price-sensitivity of equity vesting over the upcoming year. This sensitivity is determined by equity grants made several years prior, and thus unlikely to be driven by current investment opportunities. An interquartile increase is associated with a decline of 0.11% in the growth of R&D (scaled by total assets), 37% of the average R&D growth rate. Newly-vesting equity increases the likelihood of meeting or marginally beating analyst earnings forecasts. However, the market’s reaction to doing so is lower, suggesting that it recognizes CEOs’ myopic incentives. More broadly, by introducing a measure of incentives that is not driven by the current contracting environment, our paper suggests that CEO contracts affect real outcomes.

Number of Pages in PDF File: 60

Keywords: Short-Termism, Managerial Myopia, Vesting, CEO Incentives

JEL Classification: G31, G34

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Date posted: May 27, 2013 ; Last revised: March 31, 2014

Suggested Citation

Edmans, Alex and Fang, Vivian W. and Lewellen, Katharina, Equity Vesting and Managerial Myopia (March 31, 2014). ECGI - Finance Working Paper No. 379/2013. Available at SSRN: http://ssrn.com/abstract=2270027 or http://dx.doi.org/10.2139/ssrn.2270027

Contact Information

Alex Edmans (Contact Author)
London Business School - Institute of Finance and Accounting ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
University of Pennsylvania - The Wharton School ( email )
3733 Spruce Street
Philadelphia, PA 19104-6374
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Vivian W. Fang
University of Minnesota - Twin Cities - Department of Accounting ( email )
321 19th Avenue South
Room 3-109
Minneapolis, MN 55455
United States
Katharina Lewellen
Dartmouth College - Tuck School of Business ( email )
Hanover, NH 03755
United States
603-646-8247 (Phone)
HOME PAGE: http://oracle-www.dartmouth.edu/dart/groucho/tuck_faculty_and_research.faculty_profile?p_id=QE2X25
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