The Uneasy Case for Favoring Long-Term Shareholders

Abstract:     
Proposals to favor long-term shareholders of public firms are based on a widely-held belief: that long-term shareholders, unlike short-term shareholders, benefit from managers maximizing the long-term economic value generated by the firm. This belief, I show, is mistaken. Long-term shareholders, like short-term shareholders, can benefit from managers destroying economic value — even if the firm’s only residual claimants are its shareholders. My analysis suggests that the case for shifting power from short-term to long-term shareholders is substantially weaker than it might appear.

Number of Pages in PDF File: 66

Keywords: corporate governance, short-termism, short-term shareholders, long-term shareholders, agency costs, earnings manipulation, managerial myopia, share repurchases, open market repurchases, acquisitions, seasoned equity offerings, real earnings management

JEL Classification: G32, G34, G35, G38, K22

working papers series