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Title: The Long-Term Consequences of Short-Term Incentives

Author(s): Alex Edmans, Vivian Fang and Allen Huang

Publication Date: September 2017

Keyword(s): CEO Incentives, M&A, Managerial Myopia, Repurchases, Short-termism and Vesting

Programme Area(s): Financial Economics

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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Bibliographic Reference

Edmans, A, Fang, V and Huang, A. 2017. 'The Long-Term Consequences of Short-Term Incentives'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12305