Do Short-Term Incentives Affect Long-Term Productivity?
52 Pages Posted: 1 Jul 2019 Last revised: 25 Feb 2020
Date Written: February 2020
Previous research shows that incentives to increase earnings-per-share cause firm to increase stock repurchases and reduce investment and employment. It is natural to expect firms to cut less productive investment and employment first, which could lead to a positive effect on firm-level productivity. However, using Census data, we find that firms make cuts across the board irrespective of plant productivity. This pattern seems to be associated with frictions in the labor market. Specifically, we find evidence that unionization of the labor force may prevent firms from doing efficient downsizing, forcing them to engage in easy or expedient downsizing instead. As a result of this inefficient downsizing, firms experience deterioration in long-term productivity. Our findings show that allocating more power to a stakeholder could enhance corporate short-termism.
Keywords: Productivity, Employment, Labor unions, Investment, Short-termism, Share repurchases
JEL Classification: G32, G35, J23
Suggested Citation: Suggested Citation