The Long-Term Consequences of Short-Term Incentives

61 Pages Posted: 18 Sep 2017 Last revised: 6 Aug 2018

See all articles by Alex Edmans

Alex Edmans

London Business School - Institute of Finance and Accounting; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Vivian W. Fang

University of Minnesota - Twin Cities - Department of Accounting

Allen Huang

Hong Kong University of Science and Technology - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: July 27, 2018

Abstract

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

Edmans, Alex and Fang, Vivian W. and Huang, Allen, The Long-Term Consequences of Short-Term Incentives (July 27, 2018). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 527/2017. Available at SSRN: https://ssrn.com/abstract=3037354 or http://dx.doi.org/10.2139/ssrn.3037354

Alex Edmans (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

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London NW1 4SA
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European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
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Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Vivian W. Fang

University of Minnesota - Twin Cities - Department of Accounting ( email )

321 19th Avenue South
Room 3-109
Minneapolis, MN 55455
United States

HOME PAGE: http://www.vivianfang.org

Allen Huang

Hong Kong University of Science and Technology - Department of Accounting ( email )

LSK Business School Building
HKUST
Clear Water Bay, Kowloon
Hong Kong
+852-23587559 (Phone)

HOME PAGE: http://www.AllenHuang.org

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