The Long-Term Consequences of Short-Term Incentives
54 Pages Posted: 18 Sep 2017 Last revised: 5 Jun 2018
Date Written: February 1, 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. We show that a potential driver of the negative long-run 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. 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