Are today’s businesses plagued by short-termism? The narrative is compelling. Executives cut investment to hit short-term earnings targets and trigger bonus payouts, the argument goes. They are egged on by short-term shareholders, who care only about making a quick buck, rather than growing the company for the long term. Moreover, long-term investments — such as reducing carbon emissions, developing blockbuster drugs, or training workers — benefit more than just shareholders. So, the charge that businesses are deprioritizing them leads to concerns that business no longer serves society.
Study: When CEOs’ Equity Is About to Vest, They Cut Investment to Boost the Stock Price
It’s more (and more-rigorous) evidence of short-termism.
February 28, 2018
Summary.
Does short-termism exist? And, if it does, what’s the underlying cause? A new study finds that the more equity CEOs have vesting in a given quarter, the more they cut investment. Vesting equity encourages CEOs to take actions with destructive long-term consequences. The research suggests that the horizon of pay is more important than the total value. It affects the CEO’s incentives to invest, with major implications for the company’s long-run success and contribution to society.