If You Want to Maximize Profits, Manage for the Long-Term

43 Pages Posted: 30 Oct 2020

See all articles by Yrjo Koskinen

Yrjo Koskinen

Haskayne School of Business, University of Calgary; European Corporate Governance Institute (ECGI)

J. Ari Pandes

University of Calgary - Haskayne School of Business

Shuai Yang

University of Calgary - Haskayne School of Business

Date Written: October 14, 2020

Abstract

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

Suggested Citation

Koskinen, Yrjo J and Pandes, J. Ari and Yang, Shuai, If You Want to Maximize Profits, Manage for the Long-Term (October 14, 2020). Available at SSRN: https://ssrn.com/abstract=3721803 or http://dx.doi.org/10.2139/ssrn.3721803

Yrjo J Koskinen

Haskayne School of Business, University of Calgary ( email )

SH 154, 2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
+1-403-220-5540 (Phone)

HOME PAGE: http://https://profiles.ucalgary.ca/yrjo-koskinen

European Corporate Governance Institute (ECGI) ( email )

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

HOME PAGE: http://https://ecgi.global/users/yrj%C3%B6-koskinen

J. Ari Pandes

University of Calgary - Haskayne School of Business ( email )

2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
403 220-4350 (Phone)

Shuai Yang (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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