The Long-Term Consequences of Short-Term Incentives

Edmans, A, Fang, V W and Huang, A (2020) The Long-Term Consequences of Short-Term Incentives. Working Paper. Social Sciences Research Network.

Abstract

This paper shows that short-term stock price concerns induce CEOs to take value-reducing actions. Vesting equity, our measure of short-term concerns, is positively associated with the probability of a firm repurchasing shares, the amount of shares repurchased, and the probability of the firm announcing a merger and acquisition (M&A). When vesting equity increases, stock returns are more positive in the two quarters surrounding both repurchases and M&A, but more negative in the two years following repurchases and four years following M&A. These results are inconsistent with CEOs buying underpriced stocks or companies to maximize long-run shareholder value, but consistent with these actions being used to boost the short-term stock price and improve the conditions for equity sales. Overall, by identifying actions that carry clear value implications, this paper documents the long-term negative consequences of short-term incentives.

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Item Type: Monograph (Working Paper)
Subject Areas: Finance
Date Deposited: 20 Jan 2021 12:44
Last Modified: 17 Apr 2024 01:20
URI: https://lbsresearch.london.edu/id/eprint/1637
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