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
November 28, 2013
ECGI - Finance Working Paper No. 379/2013
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 equity to the stock price. However, in myopia theories, the driver of short-termism is not the magnitude of incentives but their horizon. We use recent changes in compensation disclosure to introduce a new empirical measure that is tightly linked to theory - the 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. Similar results hold when including advertising and capital expenditure. Newly-vesting equity increases the likelihood of meeting or beating analyst earnings forecasts by a narrow margin. However, the market’s reaction to doing so is lower, suggesting that it recognizes CEOs’ myopic incentives.
Number of Pages in PDF File: 60
Keywords: Short-Termism, Managerial Myopia, Vesting, CEO Incentives
JEL Classification: G31, G34working papers series
Date posted: May 27, 2013 ; Last revised: November 28, 2013
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