The Long-Term Consequences of Short-Term Incentives

The Long-Term Consequences of Short-Term Incentives

Alex Edmans, Vivian W. Fang, Allen H. Huang

Series number :

Serial Number: 
527/2017

Date posted :

October 28 2017

Last revised :

December 31 2019
SSRN Share

Keywords

  • Repurchases • 
  • M&A • 
  • short-termism • 
  • CEO Incentives • 
  • managerial myopia • 
  • Vesting

This paper shows that short-term stock price concerns induce CEOs to take value-reducing actions.

Vesting equity, our measure of short-term concerns, is positively associated with the probability of a firm repurchasing shares, the amount of shares repurchased, and the probability of the firm announcing a merger or acquisition (M&A). However, vesting equity is associated with more negative long-term returns over the 2-3 years following repurchases and 4 years following M&A. A potential driver of the negative M&A returns is subsequent goodwill impairment. These results are inconsistent with CEOs buying underpriced stock or companies to maximize long-run shareholder value, but consistent with these actions being used to boost the short-term stock price and thus equity sale proceeds. CEOs sell their own stock shortly after using company money to buy the firm’s stock, also inconsistent with repurchases being motivated by undervaluation.

Published in

Published in: 
Description: 
Investor Responsibility Research Center (IRRC) Institute Research Award, 2017 International Centre for Pension Management Research Award, 2018

Authors

Real name:
Allen H. Huang
Real name:
Vivian W. Fang