Do lucky CEOs avoid innovation?

ABSTRACT

Stock options are one of the most widely used equity-based compensation mechanisms to mitigate misalignment between managers’ and shareholders’ interests. And yet, it is sometimes suspiciously used as a method of extracting shareholders’ wealth to managers (Bebchuk et al., 2009). The typical ways to do so is using opportunistic timing such as backdating, spring-loading, etc. As shown in Bebchuk et al. (2010), opportunistic timing of option grants increases the incidence of lucky grants, or stock option grants that CEOs receive when the price is abnormally low. We investigate whether lucky grants to CEOs impact firm innovations and, by extension, long-term growth. Using patent citations as a proxy variable for innovation (Kogan et al., 2017), we find that innovation decreases if CEOs received lucky grant in the previous year. The results imply that lucky grants may reduce the incentive for CEOs to invest in risky, long-term projects and negatively affect fir innovation.

KEYWORDS:

• Executive compensation
• opportunistic timing
• innovation

JEL CLASSIFICATION:

• G34
• M12
• O32

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ To measure innovation and to accommodate a critical nature of the innovation process and its effects, we use a forward structure of a long-horizon innovation measure as a sum of the citation-weighted patent counts for the focal year over three years.