This paper investigates whether high equity incentives encourage Chief Executive Officers (CEOs) to focus on short-term stock prices and pursue investment strategies to maximize stock returns in the short-run. Using regression methodology, the paper shows that firms that grant high equity incentives to CEOs have significantly higher investment-stock price sensitivity, and their investments are especially sensitive to the sentiment component of stock price. The evidence is consistent with the hypothesis that equity incentives shorten CEOs' decision horizons, and that managers cater to investor sentiment when investing to boost short-term stock prices. Moreover, CEOs with high equity incentives are more likely to cut discretionary expenditures (research and development expenditures, advertising expenses, selling, and general and administrative expenses) around the zero earnings threshold to avoid reporting losses. On the other hand, CEOs holding long-term incentive plans are less likely to cater to investor sentiment when making investment decisions, and are less likely to cut discretionary spending to inflate reported earnings.
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