Do Short-Term Incentives Affect Long-Term Productivity?

Vyacheslav Fos, Heitor Almeida, Nuri Ersahin, Rustom M Irani and ,
Authors registered in the RePEc Author Service: Mathias Kronlund

No 13894, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Previous research shows that stock repurchases that are caused by earnings management lead to reductions in firm-level 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, EPS-driven repurchases lead to a reduction in long-term productivity.

Keywords: Productivity; Employment; Labor unions; investment; Short-termism; Share repurchases (search for similar items in EconPapers)
JEL-codes: G32 G35 J23 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-bec, nep-eff and nep-lma
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Working Paper: Do Short-Term Incentives Affect Long-Term Productivity? (2020)
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