Do managers sometimes take actions that boost performance in the short term, but reduce value in the long term? Financial analysts and policymakers frequently express concern about managerial short-termism. Business leaders like Jamie Dimon and Warren Buffet recently joined the fray, arguing that “companies frequently hold back on technology spending, hiring, and research and development to meet quarterly earnings forecasts.” (See “Short-Termism Is Harming the Economy”, Wall Street Journal, June 6, 2018.) Yet little clean evidence exists on the prevalence of managerial short-termism.
In our paper, Managerial Short-Termism and Investment: Evidence from Accelerated Option Vesting, forthcoming in the Review of Finance, we provide new evidence that CEOs with more short-term incentives spend less on long-term investment. We start from the insight that CEOs’ incentive horizons are determined largely by the length of the vesting periods on their equity pay grants. Short vesting periods make it more likely that CEOs pump up the stock price and then quickly sell their shares at a profit. Investment cuts are a plausible target for myopic CEOs, because investors may only realize the long-term consequences years down the road. Therefore we examine whether CEOs reduce investment when vesting periods become shorter.