Do Short-Term Incentives Affect Long-Term Productivity?

Abstract

Previous research shows that short-term incentives lead the firm to increase stock buybacks, reducing investments in capital and employment. It is natural to expect that such firms will cut their less productive projects first, with little or even a positive effect on firm-level productivity. Yet, using detailed plant-level Census data, we find that firms make cuts across the board irrespective of each plant's productivity in response to short-term incentives. Unionization of the labor force drives these results by preventing firms from doing efficient downsizing, suggesting that stakeholders can amplify negative consequences of corporate short-termism.

Keywords: Productivity, Employment, Labor unions, Investment, Short-termism, Share repurchases

JEL Classification: G32, G35, J23