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Equity Vesting and Investment

Review of Financial Studies, Forthcoming

ECGI - Finance Working Paper No. 379/2013

59 Pages Posted: 27 May 2013 Last revised: 16 Dec 2016

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Vivian W. Fang

University of Minnesota - Twin Cities - Department of Accounting

Katharina Lewellen

Tuck School of Business at Dartmouth

Multiple version iconThere are 3 versions of this paper

Date Written: December 16, 2016

Abstract

This paper links the CEO’s concerns for the current stock price to reductions in real investment. We identify short-term concerns using the amount of stock and options scheduled to vest in a given quarter. A one standard deviation increase in vesting equity is associated with an annualized 0.2% decline in growth in R&D plus net capital expenditure (scaled by total assets), 11% of the average investment-to-assets ratio. Vesting equity is also associated with positive analyst forecast revisions and positive earnings guidance during the same quarter. More broadly, by introducing a measure of incentives that is determined by equity grants made several years prior, and thus unlikely to be driven by current investment opportunities, our paper provides evidence that CEO contracts affect real decisions.

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

JEL Classification: G31, G34, M12, M52

Suggested Citation

Edmans, Alex and Fang, Vivian W. and Lewellen, Katharina, Equity Vesting and Investment (December 16, 2016). Review of Financial Studies, Forthcoming; ECGI - Finance Working Paper No. 379/2013. Available at SSRN: https://ssrn.com/abstract=2270027 or http://dx.doi.org/10.2139/ssrn.2270027

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

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

HOME PAGE: http://www.vivianfang.org

Katharina Lewellen

Tuck School of Business at Dartmouth ( 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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