Stock option vesting conditions, CEO turnover, and myopic investment

Volker Laux

Journal of Financial Economics, 2012, vol. 106, issue 3, 513-526

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.

Keywords: Executive pay; Stock option vesting; Managerial myopia; CEO turnover (search for similar items in EconPapers)
JEL-codes: D82 J33 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (48)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:106:y:2012:i:3:p:513-526

DOI: 10.1016/j.jfineco.2012.06.003

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