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Managerial Short-Termism and Investment: Evidence from Accelerated Option Vesting

Author

Listed:
  • Tomislav Ladika
  • Zacharias Sautner

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.

Suggested Citation

  • Tomislav Ladika & Zacharias Sautner, 2020. "Managerial Short-Termism and Investment: Evidence from Accelerated Option Vesting," Review of Finance, European Finance Association, vol. 24(2), pages 305-344.
    • Handle: RePEc:oup:revfin:v:24:y:2020:i:2:p:305-344.
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    File URL: http://hdl.handle.net/10.1093/rof/rfz012
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    Citations

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    Cited by:

    1. Lel, Ugur & Tepe, Mete, 2021. "Investor horizon and managerial short-termism," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 1-20.
    2. Cook, Douglas O. & Zhang, Weiwei, 2022. "CEO option incentives and corporate share repurchases," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 355-376.
    3. Moore, David, 2023. "Strategic repurchases and equity sales: Evidence from equity vesting schedules," Journal of Banking & Finance, Elsevier, vol. 146(C).
    4. Edmans, Alex & Gosling, Tom & Jenter, Dirk, 2023. "CEO compensation: Evidence from the field," Journal of Financial Economics, Elsevier, vol. 150(3).
    5. Pollock, Susan & Switzer, Lorne N. & Wang, Jun, 2023. "The dynamics of CEO equity vs. inside debt and firm performance," Research in International Business and Finance, Elsevier, vol. 64(C).
    6. Alex Edmans & Vivian W. Fang & Allen H. Huang, 2022. "The Long‐Term Consequences of Short‐Term Incentives," Journal of Accounting Research, Wiley Blackwell, vol. 60(3), pages 1007-1046, June.
    7. Colonnello, Stefano & Curatola, Giuliano Antonio & Xia, Shuo, 2022. "Trading away incentives," IWH Discussion Papers 23/2022, Halle Institute for Economic Research (IWH).
    8. Martin Nienhaus, 2022. "Executive equity incentives and opportunistic manager behavior: new evidence from a quasi-natural experiment," Review of Accounting Studies, Springer, vol. 27(4), pages 1276-1318, December.
    9. Fu, Xudong & Huang, Minjie & Tang, Tian, 2022. "Duration of executive compensation and maturity structure of corporate debt," Journal of Corporate Finance, Elsevier, vol. 73(C).
    10. Małgorzata Janicka & Artur Sajnóg, 2022. "The ESG Reporting of EU Public Companies—Does the Company’s Capitalisation Matter?," Sustainability, MDPI, vol. 14(7), pages 1-17, April.

    More about this item

    Keywords

    Managerial short-termism; Corporate investment; Vesting duration; FAS 123-R;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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