50 Pages Posted: 18 Sep 2017 Last revised: 19 Sep 2017
Date Written: September 15, 2017
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 and 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. These results are inconsistent with CEOs buying underpriced stocks 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 equity sales. Overall, by identifying actions that carry clear value implications, this paper documents the long-term negative consequences of short-term incentives.
Keywords: Repurchases, M&A, Short-Termism, CEO Incentives, Managerial Myopia, Vesting
JEL Classification: G12, G14, G32, G34, G35, M12, M52
Suggested Citation: Suggested Citation
Edmans, Alex and Fang, Vivian W. and Huang, Allen, The Long-Term Consequences of Short-Term Incentives (September 15, 2017). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 527/2017. Available at SSRN: https://ssrn.com/abstract=3037354