Long-term Accounting-based Plans and Managerial Myopia

In recent years, performance-based plans especially those based on multiple-year accounting performance (MAPs) become the biggest component of CEO pay. In contrast to traditional time-based stock options, the MAPs condition the granting of awards on accounting performance measured over multiple years, and are perceived to better align the long-term interests of managers and shareholders. However, we find that a disproportionately large (small) number of firms just beat (miss) the performance target of the MAPs. We further find that compared with non-adopters, MAP adopters engage in greater accrual- and real-earnings management, reduce their R&D investment, patent applications and acquisition activities. For the mechanisms, we find that the overlapping issuance of MAPs which subjects the CEO to annual performance evaluation is a significant cause of managerial myopia. In addition, managerial myopia is stronger when the MAP sets more challenging goals, uses earnings metrics as opposed to non-earnings metrics, has a greater impact on CEO pay, and when the plan is adopted by firms following their industry leaders. Our study shows that MAPs, the most popular compensation tool in the past two decades increase rather than decrease managerial myopia. Our study illustrates the high sensitivity of CEO myopic incentives to accounting earnings even when the performance is measured over longer horizons