‘Managerial Myopia’: How CEOs Pump Up Earnings for Their Own Gain

Tue, 18 Mar 2014 14:59:44 +1100

Andrew Pam <xanni [at] glasswings.com.au>

Andrew Pam
http://knowledge.wharton.upenn.edu/article/managerial-myopia-ceos-pump-earnings-gain/

"New research by Wharton finance professor Alex Edmans and two colleagues sheds
some light on how an incentive plan can backfire. It shows how an approaching
vesting of stock options can cause a CEO to pump up the firm’s earnings, and
thus its stock price, by cutting investment in research and development,
advertising and capital expenditures. Assuming those would have been beneficial
investments, the approaching vesting puts the CEO’s interests at odds with the
firm’s."

Stock grants are meant to align the CEO's objectives with those of the company,
but that doesn't always work quite as intended.

Cheers,
*** Xanni ***

--
Andrew Pam
Partner, Glass Wings http://glasswings.com.au/

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