Managerial Short-Termism and Investment: Evidence from Accelerated Option Vesting

Abstract

We show that executives cut investment when their incentives become more short-term. We examine a unique event in which hundreds of firms eliminated option vesting periods to avoid a drop in income under accounting rule FAS 123-R. This event allowed executives to exercise options earlier and thus profit from boosting short-term performance. Our identification exploits that FAS 123-R’s adoption was staggered almost randomly by firms’ fiscal year-ends. CEOs cut investment and reported higher short-term earnings after option acceleration, and they subsequently increased equity sales.

Keywords: Managerial myopia, corporate investment, vesting duration, FAS 123-R

JEL Classification: G31, G32, G34