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

Speaker(s): 
Zacharias Sautner (Frankfurt School of Finance & Management)
Date: 
Thursday, October 23, 2014 - 2:00pm
Location: 
Spandauer Straße 1, Room 23

We show that executives with more short-term incentives engage in myopic behavior by reducing investment. We document this effect by exploiting a unique event, in which more than 700 firms accelerated the vesting periods on executive stock options to avoid an accounting expense under FAS 123‐R. This led to a substantial decrease in executives' incentives--at accelerating firms 52% of unvested equity became immediately exercisable, and CEOs responded with a significant increase in both option exercises and equity sales. To identify causality, we exploit exogenous variation in the timing of FAS 123‐R--firms with fiscal year ending June or later had to comply in 2005, while all other firms could postpone compliance until 2006. We show that firms that accelerated option vesting in response to an earlier FAS 123‐R compliance date reduce investment. This effect is concentrated among firms that face low competition and low analyst coverage.