The Long-Term Consequences of Short-Term Incentives

Edmans, A, Fang, V W and Huang, A H (2021) The Long-Term Consequences of Short-Term Incentives. Journal of Accounting Research. ISSN 0021-8456 (In Press) OPEN ACCESS

Abstract

This paper studies the long-term consequences of actions induced by vesting equity, a measure of short-term incentives. Vesting equity 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 or acquisition (M&A). However, it is also associated with more negative long-term returns over the 2-3 years following repurchases and 4 years following M&A, as well as future M&A goodwill impairment. These results are inconsistent with CEOs buying underpriced stock or companies to maximize long-run shareholder value, but consistent with these actions being used to boost the short-term stock price and thus equity sale proceeds. CEOs sell their own stock shortly after using company money to buy the firm’s stock, also inconsistent with repurchases being motivated by undervaluation.

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Item Type: Article
Subject Areas: Finance
Additional Information:

Edmans gratefully acknowledges financial support from European
Research Council Starting Grant 638666

Funder Name: European Research Council
Date Deposited: 24 Sep 2021 10:29
Date of first compliant deposit: 20 Sep 2021
Subjects: Financial markets
Mergers and acquisitions
Accounting valuations
Pay incentives
Last Modified: 12 Jan 2022 06:15
URI: https://lbsresearch.london.edu/id/eprint/1971
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