The Long-Term Consequences of Short-Term Incentives

Edmans, Alex; Fang, Vivian W.; Huang, Allen

doi:10.2139/ssrn.3037354

Cited by 24 publications

(19 citation statements)

References 81 publications

(23 reference statements)

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“…Share repurchases represent a potential mechanism to temporarily support stock prices at shareholders' expense. Consistent with managers using repurchases to prop up prices for personal gain, Edmans, Fang, and Huang (2018) and Moore (2018) show repurchases increase around chief executive officer (CEO) equity vesting dates. Another growing literature suggests managers use repurchases to meet earnings per share (EPS) thresholds linked to CEO bonuses and analysts' estimates and these types of repurchases are associated with declines in employment and investment (Cheng, Harford, and Zhang (2015), Almeida, Fos, and Kronlund (2016)).…”

Section: Introductionmentioning

confidence: 90%

“…Survey evidence reveals that 78% of executives would sacrifice long-term value to meet earnings targets (Graham et al (2005)). A recent line of research uses CEO equity vesting schedules to instrument for enhanced managerial incentives to manipulate stock price and finds managers reduce investment growth (Edmans et al (2017)), strategically release news (Edmans et al (2018)), and increase M&A and repurchase activity (Edmans et al (2018), Moore (2018)) around equity vesting. We contribute to this literature by presenting a case in which managers have an incentive to prop up stock prices using firm resources and, perhaps surprisingly, find the average managerial team does not behave myopically.…”

Section: B Managerial Myopia Literaturementioning

confidence: 99%

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Why Do Firms Disagree with Short Sellers? Managerial Myopia versus Private Information

Bargeron¹,

Bonaimé²

2019

J. Financ. Quant. Anal.

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Though short sellers on average succeed at identifying overvalued equity, firms often signal disagreement with short sellers by repurchasing stock when short interest increases. We investigate whether this disagreement reflects a myopic defense of inflated prices, or positive private information. These repurchases appear motivated by managers’ private information, not agency issues, even when managerial benefits to short-termism are enhanced or monitoring is weaker. Managers’ informational advantage relates to subsequent news, earnings, and risk, but is attenuated if activists target management or insiders sell. A trading strategy based on our findings earns 7.5% annually.

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Section: Introductionmentioning

confidence: 90%

Section: B Managerial Myopia Literaturementioning

confidence: 99%

Why Do Firms Disagree with Short Sellers? Managerial Myopia versus Private Information

Bargeron¹,

Bonaimé²

2019

J. Financ. Quant. Anal.

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“…Bebchuk and Stole (1993) argue that asymmetric information between managers and shareholders can lead to sub-optimal investment. Examples of short-term behaviors are forgoing positive-NPV projects that sacrifice short-term performance, undertaking negative-NPV projects that boost short-term per-formance, M&A announcements, and stock repurchases with free cash (Edmans et al 2017b(Edmans et al , 2019. Bizjak et al (1993) and Cadman et al (2013) show that long-term equity is used more frequently in industries where short-term performance is an unreliable predictor of long-term performance.…”

Section: Related Literature and Hypothesesmentioning

confidence: 99%

“…The literature hitherto has identified short-termism as a problem (Narayanan 1985;Bebchuk and Stole 1993;Edmans et al 2019;Marinovic and Varas 2019), but not systematically assessed distributional differences in the time horizon of executive compensation. I find significant distributional heterogeneity of short-term and long-term performance-pay relations.…”

Section: Introductionmentioning

confidence: 99%

Distributional differences in the time horizon of executive compensation

Haylock

2021

Empir Econ

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The aim of executive compensation plans is to incentivize executives to maximize long-term firm value. Past research shows that executives’ pay is determined by short-term stock performance to a substantial degree. This paper tests for distributional differences in the time horizon of the performance–pay relation, controlling for executive-firm fixed effects in a quantile regression framework. I identify short-term and long-term firm and industry performance using a filter and estimate distributional differences in the short-term and long-term performance–pay relation using method of moments–quantile regression (Machado and Santos Silva in J Econ 213:145–173, 2019). I find the right tail of the conditional total compensation distribution has a more long-term-oriented performance–pay relation than the left tail. By contrast, the right tail of the conditional accumulated wealth distribution has more short-term-oriented performance–pay relation than the left tail. Results show that asymmetry in short-term firm performance–pay relations may exist, but do not vary across the conditional distribution.

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“…From an academic perspective, it has motivated considerable theoretical and empirical research, highlighting the hidden cost of financial incentives and the dangers of such pay structures and bonus culture (see e.g., Bénabou and Tirole 2016; Sliwka 2007). Stock options and bonuses increase with volatility and push CEOs to take risks, rewarding them for luck without even being aligned to shareholders’ (long‐term) interests (Bebchuk, Cohen, and Spamann 2010; Bertrand and Mullainathan 2001; Edmans, Fang, and Huang 2017). In some countries, policymakers recently reacted by adopting laws requiring companies to hold say‐on‐pay votes, publish CEO‐to‐worker pay ratios, or limit bonuses, and pension funds now increasingly use their ownership rights to voice discontent when executive compensation packages are deemed excessive.…”

Section: Theoretical Framework and Hypotheses Developmentmentioning

confidence: 99%

Corporate Social Responsibility and Governance: The Role of Executive Compensation

Cavaco¹,

Crifo²,

Guidoux³

2020

Industrial Relations

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This article examines the relationship between corporate governance and corporate sustainability by focusing on an essential component of companies' governance structure: executive compensation programs. We propose an original empirical strategy based on a large set of the biggest capitalizations in Organization for Economic Cooperation and Development (OECD) countries over the period 2004-2018, with explicit measures of how companies integrate into executive managers' remuneration precise criteria of corporate social responsibility, an incentive scheme called corporate social responsibility (CSR) contracting. Our results show that proposing executive compensation programs including CSR criteria has a negative impact on financial performance, and a large positive impact on extra-financial performance based on the following dimensions: relationship with customers and suppliers, and community involvement. Second, we explore the moderating role of the corporate governance model by distinguishing the impact between firms with a shareholder or stakeholder corporate governance model and reveal significant differences in the impact of CSR contracting. For firms with a stakeholder corporate governance model, CSR contracting is no longer associated with a fall of financial performance and has a large positive impact on human resources, environmental, and human rights performance. On the other hand, CSR contracting has a negative impact on financial performance but no impact on extra-financial performance for firms with a shareholder corporate governance model. JEL codes: M14, M12, G30, C23. *The authors' affiliations are LEMMA, University Panth eon-Assas,

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The Long-Term Consequences of Short-Term Incentives

Cited by 24 publications

References 81 publications

Why Do Firms Disagree with Short Sellers? Managerial Myopia versus Private Information

Why Do Firms Disagree with Short Sellers? Managerial Myopia versus Private Information

Distributional differences in the time horizon of executive compensation

Corporate Social Responsibility and Governance: The Role of Executive Compensation

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