Unanticipated effects of restricted stock on managers' risky investment decisions

We conduct a laboratory experiment to examine whether holding periods for stock compensation affect managers' willingness to take large risks for their firms in order to pursue personal gains. The theoretical lens through which we examine these issues involves the concepts of current-self (the person you are now) and future-self (the person you will be in the future). Results indicate that long holding requirements can decrease manager's feelings of connectedness to their future selves. This change in decision perspective increases managers' willingness to accept risks for their firms when the potential personal rewards of risk taking are high. The findings call into question the current view held by regulators and academics that long holding requirements will consistently reduce adverse consequences of performance-based executive compensation. We find that long holding requirements can actually increase managers' willingness to pursue investments with very low chances of success when large performance incentives are available.