Equity Vesting and Investment

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.