The Effect of Managerial Short‐Termism on Corporate Investment

Abstract

We show that executives with more short-term incentives spend less on long-term investment. We examine a unique event in which hundreds of firms eliminated option vesting periods to avoid an accounting expense under FAS 123-R. This allowed executives to exercise options earlier and to profit from boosting short-term performance. Our identification exploits that FAS 123-R's timing was staggered almost randomly by firms' fiscal year ends. CEOs responded to option acceleration by cutting investment, increasing equity sales, and departing more frequently. Accelerating firms' stocks initially rose, but then underperformed over the long term. Our findings support managerial myopia theories.