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Do Short-Term Incentives Affect Long-Term Productivity?

Author

Listed:
  • Heitor Almeida
  • Nuri Ersahin
  • Vyacheslav Fos
  • Rustom M. Irani
  • Mathias Kronlund

Abstract

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.

Suggested Citation

  • Heitor Almeida & Nuri Ersahin & Vyacheslav Fos & Rustom M. Irani & Mathias Kronlund, 2020. "Do Short-Term Incentives Affect Long-Term Productivity?," Working Papers 20-10, Center for Economic Studies, U.S. Census Bureau.
    • Handle: RePEc:cen:wpaper:20-10
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    File URL: https://www2.census.gov/ces/wp/2020/CES-WP-20-10.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    roductivity; Employment; Labor unions; Investment; Short-termism; Share repurchases;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand

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