Working Paper: NBER ID: w19407
Authors: Alex Edmans; Vivian W. Fang; Katharina A. Lewellen
Abstract: 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.
Keywords: managerial myopia; equity vesting; real investment; CEO incentives; earnings forecasts
JEL Codes: G31; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sensitivity of newly vesting equity (G12) | growth of R&D (O39) |
| newly vesting equity (G12) | likelihood of meeting or beating analyst earnings forecasts (G17) |
| instrumented equity sales (G12) | growth of R&D (O39) |
| sensitivity of newly vesting equity (G12) | instrumented equity sales (G12) |