The Long-Term Consequences of Short-Term Incentives

Alex Edmans, Vivian Fang and Allen Huang

No 12305, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: 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 and acquisition (M&A). When vesting equity increases, stock returns are more positive in the two quarters surrounding both repurchases and M&A, but more negative in the two years following repurchases and four years following M&A. These results are inconsistent with CEOs buying underpriced stocks or companies to maximize long-run shareholder value, but consistent with these actions being used to boost the short-term stock price and improve the conditions for equity sales. Overall, by identifying actions that carry clear value implications, this paper documents the long-term negative consequences of short-term incentives.

Keywords: Repurchases; Ceo incentives; Managerial myopia; Vesting; M&a; Short-termism (search for similar items in EconPapers)
JEL-codes: G12 G14 G32 G34 G35 M12 M52 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (2)

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Journal Article: The Long‐Term Consequences of Short‐Term Incentives (2022)
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