The Uneasy Case for Favoring Long-Term Shareholders
Jesse M. Fried
Harvard Law School; European Corporate Governance Institute (ECGI)
February 26, 2014
Forthcoming, Yale Law Journal (2014)
ECGI - Law Working Paper No. 200
This paper challenges a persistent and pervasive view in corporate law and corporate governance: that a firm’s managers should favor long-term shareholders over short-term shareholders, and maximize long-term shareholders’ returns rather than the short-term stock price. Underlying this view is a strongly-held intuition that taking steps to increase long-term shareholder returns will generate a larger economic pie over time. But this intuition, I show, is flawed. Long-term shareholders, like short-term shareholders, can benefit from managers destroying value — even when the firm’s only residual claimants are its shareholders. Indeed, managers serving long-term shareholders may well destroy more value than managers serving short-term shareholders. Favoring the interests of long-term shareholders could thus reduce, rather than increase, the value generated by a firm over time.
Number of Pages in PDF File: 88
Keywords: AOL-Time Warner, 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, Wal-Mart
JEL Classification: G32, G34, G35, G38, K22Accepted Paper Series
Date posted: March 3, 2013 ; Last revised: August 24, 2014
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