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 :

February 22 2020
SSRN Share

Keywords

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

Previous research shows that incentives to increase earnings-per-share cause firm to increase stock repurchases and reduce investment and employment. It is natural to expect firms to cut less productive investment and employment first, which could lead to a positive effect on firm-level productivity.

However, using Census data, we find that firms make cuts across the board irrespective of plant productivity. This pattern seems to be associated with frictions in the labor market. Specifically, we find evidence that unionization of the labor force may prevent firms from doing efficient downsizing, forcing them to engage in easy or expedient downsizing instead. As a result of this inefficient downsizing, firms experience deterioration in long-term productivity. Our findings show that allocating more power to a stakeholder could enhance corporate short-termism.
 

Authors

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