- The Effect of Managerial Short-Termism on Corporate Investment
- Number of pages
- Universiteit van Amsterdam
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam Business School Research Institute (ABS-RI)
We provide evidence that executives with more short-term incentives engage in myopic behavior by reducing real investment. We document this effect by exploiting a unique event in 2005, in which more than 700 firms accelerated the vesting periods on executive stock options to avoid an accounting expense under FAS 123-R. To identify the effect of this shortening of incentive horizon, 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. Our instrumental variables estimates suggest that a 10% increase in the probability of accelerating options leads firms to reduce industry-adjusted investment rates by a substantial 0.023 in 2005, and a further 0.014 in 2006. This reduction in investment is concentrated among industries in which investment is easier to adjust on short notice and among firms with poor governance.
- September 2013
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