WRDS Best Paper Award for Research Examines CEO Compensation Structure – Short Term Contracts Induce CEOs to Cut Investment

Philadelphia, PA — Wharton Research Data Services (WRDS), the leading data research platform and business intelligence tool for corporate, academic and government institutions worldwide, is pleased to announce the winners of the Wharton-WRDS Best Paper Award in Empirical Finance by the Western Finance Association: Alex Edmans of the London Business School; Vivian W. Fang of the Carlson School of Management, University of Minnesota; and Katharina A. Lewellen of the Tuck School of Business at Dartmouth. Their paper, Equity Vesting and Managerial Myopia examined the impact of CEO pay on long-term company investment. WRDS, a part of the Wharton School of the University of Pennsylvania, is trusted by universities across the globe and fundamental to accelerate impactful research and enhance learning.

With increasing focus on executive pay levels and disclosure requirements, Edmans, Fang and Lewellen investigated how the structure of compensation – particularly equity vesting – impacts the long-term health of firms. To do so, they examined what makes a CEO focus on short-term stock price and cut investments, controlling for current events such as poor investment opportunities due to downturns. The researchers used WRDS to access Institutional Brokers’ Estimate System (I/B/E/S), the Center for Research in Security Prices (CRSP) and S&P Capital IQ Compustat.

Key points:

  • Equity vesting coincides with short-term reductions in investment to boost stock prices, at the expense of long-term growth.
  • The structure of the compensation package affects the health of the firm, in contrast to the common focus on the level of compensation.
  • Boards need to pay particular attention to the actions of CEOs preceding equity vesting.

“WRDS is very pleased to present the Best Paper Award to Edmans, Fang and Lewellen for their timely and important research,” said Robert Zarazowski, Managing Director of WRDS. “WRDS advances research that drives impact, and this investigation has real implications for both the current debate over executive compensation and long-term investment strategies of firms. We congratulate the authors on their excellent work.”

When a CEO’s equity vests they have a clear incentive to cut costs like R+D, marketing and employee investment to exceed earnings forecasts and boost stock prices, thereby benefiting their income. Yet these intangible investments – the most important kind of investment a firm can make in the 21st century – take many years to be reflected in stock prices. The authors show that compensation contracts induce CEOs to prioritize short-term earnings over long-term investment.

“We are grateful to WRDS for recognizing our research on vesting and its impact on long-term corporate health,” said Alex Edmans. “It’s a privilege to receive this Best Paper Award from an organization dedicated to advancing excellence in research for the real world.”

Read more about the authors and research

  • See Edmans speak at TEDx London Business School on the clear financial value of investing in people, and the time it takes to see a return.
  • Author Alex Edmans has conducted additional research that shows CEOs strategically time corporate news releases to coincide with months in which their equity vests.

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About WRDS
Wharton Research Data Services (WRDS) provides the leading business intelligence, data analytics, and financial research platform for global institutions dedicated to providing comprehensive thought leadership and historical analysis. Part of the Wharton School, WRDS is a powerful computing platform that provides unparalleled access to global financial data, research utilities, and insight into the latest innovations in academic research.

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About the Wharton School
Founded in 1881 as the first collegiate business school, the Wharton School of the University of Pennsylvania is recognized globally for intellectual leadership and ongoing innovation across every major discipline of business education. With a broad global community and one of the most published business school faculties, Wharton creates economic and social value around the world. The Wharton School has 5,000 undergraduate, MBA, executive MBA, and doctoral students; more than 9,000 participants in executive education programs annually and a powerful alumni network of 94,000 graduates.