The Long-Term Consequences of Short-Term Incentives
61 Pages Posted: 18 Sep 2017 Last revised: 6 Aug 2018
Date Written: July 27, 2018
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 or 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. A potential driver of the negative longrun returns to M&A is subsequent goodwill impairment. These results are inconsistent with CEOs buying underpriced stock 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 CEO equity sales. CEOs sell their own stock shortly after using company money to buy the firm’s stock, also inconsistent with the latter being motivated by undervaluation.
Keywords: Repurchases, M&A, Short-Termism, CEO Incentives, Managerial Myopia, Vesting
JEL Classification: G12, G14, G32, G34, G35, M12, M52
Suggested Citation: Suggested Citation