The Long-Term Consequences of Short-Term Incentives

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

Research output: Contribution to journalArticlepeer-review

17 Scopus citations

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 and acquisition (M&A). However, it is also associated with more negative long-term returns over two to three years following repurchases and four 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.

Original languageEnglish (US)
Pages (from-to)1007-1046
Number of pages40
JournalJournal of Accounting Research
Volume60
Issue number3
DOIs
StatePublished - Jun 2022

Bibliographical note

Funding Information:
Accepted by Christian Leuz. We thank the Editor, two anonymous referees, Heitor Almeida, Jack Bao, Ted Christensen, David De Angelis, Rudi Fahlenbrach, Chris Florackis, Julian Franks, Mireia Giné, Moqi Groen‐Xu, Mathias Kronlund, Tomislav Ladika, Beni Lauterbach, Lisa Liu, Chul Park, Florian Peters, Shiva Rajgopal, Christoph Schneider, Henri Servaes, Lakshmanan Shivakumar, Rui Silva, Alminas Zaldokas, and conference/seminar participants at AFA, City University of Hong Kong International Finance Conference, dbAccess Global Quant Conference, EFA, EFMA, FIRS, FMA, HKUST, IESE/ECGI Corporate Governance Conference, LBS Accounting Symposium, LSE, MIT Asia Conference in Accounting, PSU Accounting Conference, Rotterdam Executive Compensation Conference, Shanghai University of Finance and Economics, Shanghai Jiao Tong, Stanford Conference on Theory and Inference in Capital Market Research, Toulouse Corporate Governance Conference, Tsinghua, UMass Lowell, UNC/Duke Fall Camp, UT Arlington, UT Dallas, and Xiamen for comments, Jennifer Estomba of Equilar for answering numerous questions about the data, and Ali Uppal, Xinyuan Shao, and Yifan Yan for excellent research assistance. Edmans gratefully acknowledges financial support from European Research Council Starting Grant 638666 and London Business School's Deloitte Institute of Innovation and Entrepreneurship, and research support from the LBS AQR Asset Management Institute. An online appendix to this paper can be downloaded at http://research.chicagobooth.edu/arc/journal‐of‐accounting‐research/online‐supplements .

Publisher Copyright:
© 2021 The Chookaszian Accounting Research Center at the University of Chicago Booth School of Business

Keywords

  • CEO incentives
  • M&A
  • managerial myopia
  • repurchases
  • short-termism

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