Does a Long-Term Orientation Create Value? Evidence from a Regression Discontinuity

62 Pages Posted: 19 Oct 2014 Last revised: 25 Sep 2016

Caroline Flammer

Boston University

Pratima (Tima) Bansal

University of Western Ontario - Richard Ivey School of Business

Date Written: September 11, 2016

Abstract

In this paper, we theorize and empirically investigate how a long-term orientation impacts firm value. To study this relationship, we exploit exogenous changes in executives' long-term incentives. Specifically, we examine shareholder proposals on long-term executive compensation that pass or fail by a small margin of votes. The passage of such "close call" proposals is akin to a random assignment of long-term incentives and hence provides a clean causal estimate. We find that the adoption of such proposals leads to i) an increase in firm value and operating performance ― suggesting that a long-term orientation is beneficial to companies ― and ii) an increase in firms' investments in long-term strategies such as innovation and stakeholder relationships. Overall, our results are consistent with a "time-based" agency conflict between shareholders and managers.

Keywords: Long-term orientation; financial performance; innovation; stakeholder relations; agency theory; shareholder proposals; regression discontinuity

JEL Classification: G34; O16; J33; M12

Suggested Citation

Flammer, Caroline and Bansal, Pratima (Tima), Does a Long-Term Orientation Create Value? Evidence from a Regression Discontinuity (September 11, 2016). Available at SSRN: https://ssrn.com/abstract=2511507 or http://dx.doi.org/10.2139/ssrn.2511507

Caroline Flammer (Contact Author)

Boston University ( email )

Boston University Questrom School of Business
595 Commonwealth Avenue, Office 634A
Boston, MA 02215
United States

HOME PAGE: http://sites.bu.edu/cflammer/

Pratima Bansal

University of Western Ontario - Richard Ivey School of Business ( email )

London, Ontario
Canada

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