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The Long-Term Consequences of Short-Term Incentives

50 Pages Posted: 18 Sep 2017 Last revised: 19 Sep 2017

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

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Date Written: September 15, 2017

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 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

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

Alex Edmans (Contact Author)

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

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
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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