Equity Vesting and Investment

65 Pages Posted: 27 May 2013 Last revised: 11 Aug 2020

See all articles by Alex Edmans

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Vivian W. Fang

University of Minnesota - Twin Cities - Carlson School of Management; European Corporate Governance Institute (ECGI)

Katharina Lewellen

Dartmouth College - Tuck School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: December 16, 2016

Abstract

This paper links the CEO’s concerns for the current stock price to reductions in real investment. We identify short-term concerns using the amount of stock and options scheduled to vest in a given quarter. A one standard deviation increase in vesting equity is associated with an annualized 0.2% decline in growth in R&D plus net capital expenditure (scaled by total assets), 11% of the average investment-to-assets ratio. Vesting equity is also associated with positive analyst forecast revisions and positive earnings guidance during the same quarter. More broadly, by introducing a measure of incentives that is determined by equity grants made several years prior, and thus unlikely to be driven by current investment opportunities, our paper provides evidence that CEO contracts affect real decisions.

Keywords: Investment, Short-Termism, Managerial Myopia, Vesting, CEO Incentives

JEL Classification: G31, G34, M12, M52

Suggested Citation

Edmans, Alex and Fang, Vivian W. and Lewellen, Katharina, Equity Vesting and Investment (December 16, 2016). Review of Financial Studies, Forthcoming, European Corporate Governance Institute (ECGI) - Finance Working Paper No. 379/2013, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=2270027 or http://dx.doi.org/10.2139/ssrn.2270027

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Vivian W. Fang

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Katharina Lewellen

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
2,675
Abstract Views
19,054
rank
6,090
PlumX Metrics