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

Tomislav Ladika and Zacharias Sautner

Review of Finance, 2020, vol. 24, issue 2, 305-344

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.

Keywords: Managerial short-termism; Corporate investment; Vesting duration; FAS 123-R (search for similar items in EconPapers)
JEL-codes: G31 G32 G34 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (22)

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