DP13894 Do Short-Term Incentives Affect Long-Term Productivity?

Author(s): Heitor Almeida, Nuri Ersahin, Vyacheslav Fos, Rustom M Irani, Mathias Kronlund
Publication Date: July 2019
Keyword(s): employment, investment, Labor Unions, productivity, Share repurchases, Short-termism
JEL(s): G32, G35, J23
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13894

Previous research shows that stock repurchases that are caused by earnings management lead to reductions in firm-level investment and employment. It is natural to expect firms to cut less productive investment and employment first, which could lead to a positive effect on firm-level productivity. However, using Census data, we find that firms make cuts across the board irrespective of plant productivity. This pattern seems to be associated with frictions in the labor market. Specifically, we find evidence that unionization of the labor force may prevent firms from doing efficient downsizing, forcing them to engage in easy or expedient downsizing instead. As a result of this inefficient downsizing, EPS-driven repurchases lead to a reduction in long-term productivity.