Katharina Lewellen Recognized for Paper on Equity Vesting and Managerial Myopia

Lewellen and her co-authors claim the Western Finance Association’s Best Paper Award in Empirical Finance.

Lewellen and her co-authors claim the Western Finance Association’s Best Paper Award in Empirical Finance.

Katharina Lewellen, an associate professor of business administration at Tuck who teaches Corporate Finance, is a winner of the 2016 Wharton-WRDS Best Paper Award in Empirical Finance by the Western Finance Association. Lewellen shared the award with Alex Edmans of the London Business School and Vivian W. Fang of the Carlson School of Management for a 2014 paper the trio coauthored called “Equity Vesting and Managerial Myopia,” which examined the impact of CEO pay on long-term company investment.

Academics in corporate finance have long wondered if CEOs manipulate earnings—by decreasing investments in innovation and advertising—to increase the short-term stock price when they plan to sell their stock in the near future. This sort of behavior is known as “managerial myopia,” and, until recently, it was hard to prove. In their paper, Lewellen and her co-authors used the Wharton Research Data Services (WRDS) to access data that showed when CEOs’ equity vested. They then compared the equity vesting schedules to measures of long-term investment in R&D and advertising. They also looked at how vesting relates to instances when the company beats analysts’ earnings forecasts by a narrow margin—a sign that earnings might be inflated.

They found that “firms reduce investment in years in which significant CEO stock options and holdings vest.” The most likely reason for this, the authors conclude, is managerial myopia—that the CEOs were looking out for their own fortunes instead of their firms’ long-range vitality. This reality highlights the importance of the structure of compensation packages and tells corporate boards they should pay close attention to the actions of their CEO before their equity vests.

“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.”

“My co-authors and I are truly excited about the award and by the attention the paper has received both within and outside of academia,” said Lewellen. “The idea of managerial myopia is of course not new. But it turns out that it is very difficult to test or quantify empirically, yet that is exactly what we do in the paper. We are very pleased that our results have been received with so much interest.”