Equity Vesting and Managerial Myopia
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
Dartmouth College - Tuck School of Business
May 12, 2015
ECGI - Finance Working Paper No. 379/2013
This paper links the CEO’s concerns for the current stock price to reductions in real investment. These concerns depend on the amount of equity he intends to sell in the short-term, but actual equity sales are an endogenous decision. We use the amount of stock and options scheduled to vest in a given year as an instrument for equity sales. Such vesting is determined by equity grants made several years prior, and thus is unlikely to be driven by current investment opportunities; it also significantly predicts actual sales. An interquartile increase in instrumented equity sales is associated with a 0.14% decline in the growth of R&D/assets, 2.6% of the average R&D/assets ratio. Vesting-induced equity sales are also associated with a higher likelihood of meeting or marginally beating analyst earnings forecasts and higher earnings announcement returns. More broadly, by introducing a measure of incentives that is not driven by the current contracting environment – vesting-induced equity sales – our paper suggests that CEO contracts affect real outcomes.
Number of Pages in PDF File: 52
Keywords: Short-Termism, Managerial Myopia, Vesting, CEO Incentives
JEL Classification: G31, G34
Date posted: May 27, 2013 ; Last revised: May 13, 2015
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