Managerial Short-Termism and Investment: Evidence from Accelerated Option Vesting
62 Pages Posted: 29 Jun 2013 Last revised: 18 Aug 2018
Date Written: August 17, 2018
We show that executives cut long-term 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. They subsequently increased equity sales and departed more frequently. Accelerating firms’ stocks initially rose, but then underperformed over the long term.
Keywords: Managerial myopia, corporate investment, vesting duration, FAS 123-R
JEL Classification: G31, G32, G34
Suggested Citation: Suggested Citation