Prior research suggests that executive option grants that do not quickly vest provide managers with better incentives to pursue long-term, instead of short-term, objectives. Previous research also suggests that the pursuit of long-term objectives could be undermined by the risk of early termination. We conjecture that these arguments jointly suggest that managers are better motivated to pursue innovation when they are given more incentive compensation with longer vesting periods for unexercised options and yet some protection from disruptive takeover threats. Our evidence for a sample of newly public firms is consistent with more innovative firms jointly choosing such a combination.

Using several different methodologies, we quantify the statistical robustness of variables used in prior research to explain initial IPO returns. We establish a parsimonious list of robust variables and evaluate their implications for different theories of IPO underpricing and clustering. Further, we illustrate how using such a set of robust explanatory variables leads to several different conclusions than prior research that failed to include these important control variables. Researchers who identify new potential predictors of IPO initial returns should control for the list of robust variables we identify.