IRRC Institute Announces Sixth Annual Investor Research Competition Winners
The IRRC Institute has announced the winners of its sixth annual competition for research that examines the interaction between the real economy and investment theory.
The two winning academic research papers use the vesting schedule for CEO compensation – when the CEO can sell stocks and options – to demonstrate that heavy vesting periods lead to actions that suggest that some CEOs are more concerned with short-term stock price movement than long-term value creation. These are the first papers to closely examine the structure of CEO equity vesting schedules and then correlate it to value-creating or value-destroying corporate activities.
The first winning research paper, Equity Vesting and Investment, is co-authored by Alex Edmans, London Business School; Vivian W. Fang, Carlson School of Management at the University of Minnesota; and Katharina A. Lewellen,Tuck School of Business at Dartmouth. This paper studies the link between real investment decisions and CEO’s short-term stock price concerns. It finds that vesting equity induces CEOs to reduce investments in long-term projects and to take actions that increase short-term stock price. More broadly, it shows that that the structure of CEO compensation has a causal effect on real-world decisions. Download the research here.
The second winning paper, The Long-Term Consequences of Short-Term Incentives, also is co-authored by Edmans and Fang, together with Allen H. Huang of the Hong Kong University of Science and Technology. This paper studies two corporate actions that allow accurate measurement of the long-term consequences of short-term incentives – stock repurchases and mergers and acquisitions (M&A). The research shows that the impending vesting of equity may lead CEOs to take myopic actions that boost the short-term stock price at the expense of long-term value. An increase in vesting equity is associated with a greater frequency of stock repurchases and M&A announcements, and both corporate events were associated with higher short-term returns and lower long-term returns. Download the research here.
The academic paper submissions were of such high quality that the judges selected one another research paper for Honorable Mention recognition, Corporate Governance and The Rise of Integrating Corporate Social Responsibility Criteria in Executive Compensation: Effectiveness and Implications for Firm Outcomes. This research is co-authored by Caroline Flammer at Boston University’s Questrom School of Business; Bryan Hong at the University of Western Ontario’s Ivey Business School; and Dylan Minor at Northwestern University’s Kellogg School of Management. This study also examines the structure of CEO compensation, and it finds that the integration of corporate social responsibility criteria in executive compensation – a relatively recent phenomenon – leads to an increase in long-term orientation; an increase in firm value; an increase in social and environmental performance; a reduction in emissions; and an increase in green innovations. Download the research here.
Read the press release here.
This research competition has rapidly become a prominent award garnering significant attention amongst the investment community, academia and policymakers. It highlights innovative research focused on the nexus between real world economy activity and investment theory. Previous winning research has been covered by major media outlets including The Wall Street Journal, The New York Times and CNBC.
Modern Portfolio Theory (MPT) has dominated investment theory for a half century. MPT focuses on security selection, portfolio construction, and other financial issues rather than the intersection of the real economy and investing. Simultaneously, the growing importance of the private sector relative to the public sector in the real economy has increased scrutiny of private sector behavior and economic activity. The IRRCi Research Award encourages new research that analyzes how investments interact with real world economic activity.
Submissions may be an original work created specifically for the IRRCi Research Award, or relevant published unpublished papers. Please check back soon for information on the 2018 award submission deadline.
1$10,000 is awarded for each winning paper. If there are multiple authors, the award will be divided evenly between each author. Each award recipient is fully responsible for all applicable taxes.