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Stock option vesting conditions, CEO turnover, and myopic investment

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  • Laux, Volker
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    Abstract

    Corporations have been criticized for providing executives with excessive incentives to focus on short-term performance. This paper shows that investment in short-term projects has beneficial effects in that it provides early feedback about Chief Executive Officer (CEO) talent, which leads to more efficient replacement decisions. Due to the threat of CEO turnover, the optimal design of stock option vesting conditions in executive compensation is more subtle than conventional views suggest. For example, I show that long vesting periods can backfire and induce excessive short-term investments. The study generates new empirical predictions regarding the determinants and impacts of stock option vesting terms in optimal contracting.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 106 (2012)
    Issue (Month): 3 ()
    Pages: 513-526

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    Handle: RePEc:eee:jfinec:v:106:y:2012:i:3:p:513-526

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Executive pay; Stock option vesting; Managerial myopia; CEO turnover;

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    References

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    Cited by:
    1. Meg Adachi-Sato, 2013. "Incentive Pay that Causes Inefficient Managerial Replacement ," CIRJE F-Series CIRJE-F-890, CIRJE, Faculty of Economics, University of Tokyo.
    2. Baranchuk, Nina & Kieschnick, Robert & Moussawi, Rabih, 2014. "Motivating innovation in newly public firms," Journal of Financial Economics, Elsevier, vol. 111(3), pages 578-588.
    3. Meg Adachi-Sato, 2010. "Insular Decision Making in the Board Room: Why Boards Retain and Hire Substandard CEOs," CIRJE F-Series CIRJE-F-710, CIRJE, Faculty of Economics, University of Tokyo.
    4. Alex Edmans & Vivian W. Fang & Katharina A. Lewellen, 2013. "Equity Vesting and Managerial Myopia," NBER Working Papers 19407, National Bureau of Economic Research, Inc.

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