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Stock option vesting conditions, CEO turnover, and myopic investment

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  • Laux, Volker

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.

Suggested Citation

  • Laux, Volker, 2012. "Stock option vesting conditions, CEO turnover, and myopic investment," Journal of Financial Economics, Elsevier, vol. 106(3), pages 513-526.
  • Handle: RePEc:eee:jfinec:v:106:y:2012:i:3:p:513-526
    DOI: 10.1016/j.jfineco.2012.06.003
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    References listed on IDEAS

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    Cited by:

    1. repec:eee:joacli:v:38:y:2017:i:c:p:14-33 is not listed on IDEAS
    2. Alex Edmans & Vivian W. Fang & Katharina A. Lewellen, 2013. "Equity Vesting and Managerial Myopia," NBER Working Papers 19407, National Bureau of Economic Research, Inc.
    3. Michael Hilmer, 2014. "Bailouts, Bonuses and Bankers' Short-Termism," Working Papers tax-mpg-rps-2014-17, Max Planck Institute for Tax Law and Public Finance.
    4. Zona, Fabio, 2016. "Agency models in different stages of CEO tenure: The effects of stock options and board independence on R&D investment," Research Policy, Elsevier, vol. 45(2), pages 560-575.
    5. Meg Adachi-Sato, 2015. "Insular Decision Making in the Board Room: Why Boards Retain and Hire Substandard CEOs," Manchester School, University of Manchester, vol. 83(2), pages 183-216, March.
    6. Baranchuk, Nina & Kieschnick, Robert & Moussawi, Rabih, 2014. "Motivating innovation in newly public firms," Journal of Financial Economics, Elsevier, vol. 111(3), pages 578-588.
    7. Alex Edmans & Xavier Gabaix, 2016. "Executive Compensation: A Modern Primer," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1232-1287, December.
    8. Hoffmann, Florian & Inderst, Roman & Opp, Marcus, 2014. "Regulating Deferred Incentive Pay," CEPR Discussion Papers 9877, C.E.P.R. Discussion Papers.
    9. Meg Adachi-Sato, 2013. "Incentive Pay that Causes Inefficient Managerial Replacement ," CIRJE F-Series CIRJE-F-890, CIRJE, Faculty of Economics, University of Tokyo.
    10. repec:hrv:faseco:34651704 is not listed on IDEAS
    11. John Thanassoulis, 2013. "Industry Structure, Executive Pay, and Short-Termism," Management Science, INFORMS, vol. 59(2), pages 402-419, June.
    12. Egger, Peter & Radulescu, Doina, 2014. "A test of the Bolton–Scheinkman–Xiong hypothesis of how speculation affects the vesting time of options granted to directors," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 511-519.
    13. 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.

    More about this item

    Keywords

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

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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