Equity Vesting and Managerial Myopia / Alex Edmans, Vivian W. Fang, Katharina A. Lewellen.

Format:

Book

Author/Creator:

Edmans, Alex.

Contributor:

National Bureau of Economic Research.

Fang, Vivian W.

Lewellen, Katharina A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19407.

NBER working paper series no. w19407

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

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.

Notes:

Print version record

September 2013.