“Managerial Myopia and the Mortgage Meltdown” by Adam C. Kolasinski
Adam C. Kolasinski
Texas A&M University
The Hong Kong Polytechnic University
Regulators and policy makers, including the U.S. government’s Financial Crisis Inquiry Commission, have frequently asserted that managerial short-termism was at the root of the subprime mortgage crisis of 2007-2009. Scholarly work investigating the matter, however, has largely failed to find evidence of this assertion. In contrast, we find that financial firms whose CEOs had shorter equity award vesting schedules, as measured pre-crisis, were more exposed to subprime residential mortgages during the crisis than were financial firms whose CEOs had longer vesting schedules. Further, shorter vesting schedules are associated with poorer stock returns and higher probability of insolvency during the crisis. Finally, we find that shorter vesting schedules are associated with larger fines and settlements in lawsuits and enforcement actions related to subprime mortgage fraud or misrepresentation. We conclude that CEO short-termism indeed played an important role in the crisis.