Do Short-Term Incentives Affect Long-Term Productivity?

52 Pages Posted: 1 Jul 2019 Last revised: 25 Feb 2020

See all articles by Heitor Almeida

Heitor Almeida

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Nuri Ersahin

Michigan State University-Department of Finance

Vyacheslav Fos

Boston College - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Rustom M. Irani

University of Illinois at Urbana-Champaign - Department of Finance; Centre for Economic Policy Research (CEPR)

Mathias Kronlund

Tulane University

Multiple version iconThere are 2 versions of this paper

Date Written: February 2020

Abstract

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

Almeida, Heitor and Ersahin, Nuri and Fos, Vyacheslav and Irani, Rustom M. and Kronlund, Mathias, Do Short-Term Incentives Affect Long-Term Productivity? (February 2020). European Corporate Governance Institute – Finance Working Paper No. 662/2020, Available at SSRN: https://ssrn.com/abstract=3412538 or http://dx.doi.org/10.2139/ssrn.3412538

Heitor Almeida

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)

HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nuri Ersahin

Michigan State University-Department of Finance ( email )

East Lansing, MI 48824
United States
8478686532 (Phone)

HOME PAGE: http://sites.google.com/site/nuriersahin/

Vyacheslav Fos (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Rustom M. Irani

University of Illinois at Urbana-Champaign - Department of Finance ( email )

College of Business
1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://rirani.web.illinois.edu

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Mathias Kronlund

Tulane University ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

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