The Long-Term Consequences of Short-Term Incentives
52 Pages Posted: 18 Sep 2017 Last revised: 7 Jan 2020
Date Written: December 31, 2019
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). However, vesting equity is associated with more negative long-term returns over the 2-3 years following repurchases and 4 years following M&A. A potential driver of the negative M&A returns 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 thus equity sale proceeds. CEOs sell their own stock shortly after using company money to buy the firm’s stock, also inconsistent with repurchases 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