Equity Vesting and Managerial Myopia

June 4, 2013 Leave a comment

Equity Vesting and Managerial Myopia

Alex Edmans London Business School – Institute of Finance and Accounting; University of Pennsylvania – The Wharton School; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Vivian W. Fang University of Minnesota – Twin Cities – Department of Accounting

Katharina Lewellen Dartmouth College – Tuck School of Business

May 25, 2013

Abstract: 
This paper links the imminent vesting of a CEO’s equity to reductions in real investment. Existing studies measure the manager’s short-term concerns using the sensitivity of his equity to the stock price. However, in myopia theories, the driver of short-termism is not the magnitude of incentives but their horizon: equity will not induce myopia if it has a long vesting period. We use recent changes in compensation disclosure to introduce a new empirical measure that is tightly linked to theory – the stock-price sensitivity of shares and options vesting over the upcoming year. This sensitivity is determined by equity grants made several years prior, and thus unlikely to be driven by current investment opportunities. A one standard deviation increase in the sensitivity of imminently vesting equity is associated with a decline of 0.23% in the growth of R&D (scaled by total assets), 75% of the average R&D growth rate of 0.3%. Similar results hold when including advertising and capital expenditure. In addition, CEOs with imminently-vesting equity are significantly more likely to meet or beat analyst earnings forecasts by a narrow margin.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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