Do Short-Term Incentives Affect Long-Term Productivity?

Do Short-Term Incentives Affect Long-Term Productivity?

Heitor Almeida, Nuri Ersahin, Vyacheslav Fos, Rustom Irani, Mathias Kronlund

Series number :

Serial Number: 
662/2020

Date posted :

February 22 2020

Last revised :

July 09 2021
SSRN Share

Keywords

  • productivity • 
  • Employment • 
  • labor unions • 
  • investment • 
  • short-termism • 
  • share repurchases

Previous research shows that short-term incentives lead the firm to increase stock buybacks, reducing investments in capital and employment. It is natural to expect that such firms will cut their less productive projects first, with little or even a positive effect on firm-level productivity.

Yet, using detailed plant-level Census data, we find that firms make cuts across the board irrespective of each plant's productivity in response to short-term incentives. Unionization of the labor force drives these results by preventing firms from doing efficient downsizing, suggesting that stakeholders can amplify negative consequences of corporate short-termism.

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Authors

Real name:
Heitor Almeida
Real name:
Nuri Ersahin
Real name:
Rustom Irani
College of Business, University of Illinois
Real name:
Mathias Kronlund