Too much incentive to innovate? CEO stock option exercise and myopic R&D management

Abstract

Innovation is a key driver of firm success. To encourage innovation, firms often offer equity-based compensation, such as stock options, to better align CEOs' personal interests with shareholder value. Drawing on agency theory, we argue that stock options may not always benefit a firm by encouraging innovation. Instead, we demonstrate that CEOs intending to exercise their stock options have the incentive to be myopic in R&D management so that they can temporarily boost the stock price and, thus, increase their personal wealth. Using a unique multi-source dataset of 335 Standard & Poor 500 companies from 2007 to 2015, we find evidence supporting this argument. Moreover, the findings suggest that factors that can affect the perceived pressure to promote innovation by CEOs might reshape the association between stock option exercise and myopic R&D management. For example, power resulting from CEO duality decreases the perceived pressure to promote innovation, which increases the likelihood of CEOs engaging in myopic R&D management when exercising their stock options. However, when shareholders present a long investment horizon or when firms have high innovativeness, CEOs perceive more pressure to promote innovation and thus are less likely to opt for myopic R&D management while exercising stock options. The findings provide important insights for better understanding and controlling managerial myopia in innovation management.