Managerial Short-Termism and Investment: Evidence from Accelerated Option Vesting. (9th July 2019)

• Record Type: Journal Article
• Authors: Ladika, Tomislav; Sautner, Zacharias
• Is Part Of: Review of finance. Volume 24:Number 2(2020)
• Page Start: 305
• Page End: 344
• Publication Date: 2019-07-09
• Subjects: G31 -- G32 -- G34; Managerial short-termism -- Corporate investment -- Vesting duration -- FAS 123-R; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfz012
• Languages: English
• ISSNs: 1572-3097

Abstract

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.