If You Want to Maximize Profits, Manage for the Long-Term
43 Pages Posted: 30 Oct 2020
Date Written: October 14, 2020
We exploit a quasi-natural experiment and study whether the staggered enactment of constituency statutes in different U.S. states can encourage firms to manage for the long-term. Using an extended set of measures to describe the “length” of a firm’s horizon, we find that after the enactment of constituency statutes, executive compensation contracts have longer vesting periods, the shareholder composition changes towards greater institutional ownership with longer-term horizons, employee turnover is lower, firms manage earnings less and conduct fewer share repurchases, and firms extend more trade credit that reflects longer-term relationships with their customers. We further show this long-termism matters for firm performance, as it improves profitability. In additional tests, we find that results are more pronounced for firms with a greater amount of intangible assets and for whom a longer-term orientation matters most.
Keywords: constituency statutes, long-termism, profitability, executive compensation, employee turnover, trade credit
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