Equity Vesting and Managerial Myopia

54 Pages Posted: 25 Sep 2014

See all articles by Alex Edmans

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

Dartmouth College - Tuck School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: September 2014

Abstract

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 unlikely driven by current investment opportunities. An interquartile increase in instrumented equity sales is associated with a decline of 0.25% in the growth of R&D/assets, 4.6% of the average R&D/assets ratio. Vesting-induced equity sales also increase the likelihood of meeting or marginally beating analyst earnings forecasts, and are associated with higher returns to earnings announcements. 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.

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

JEL Classification: G31, G34, M12, M52

Suggested Citation

Edmans, Alex and Fang, Vivian W. and Lewellen, Katharina, Equity Vesting and Managerial Myopia (September 2014). CEPR Discussion Paper No. DP10145. Available at SSRN: https://ssrn.com/abstract=2501628

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 )

London
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

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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