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How 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 incentives to meet short-term earnings targets can cause firms to increase share buybacks, leading to cuts in investments and employment. Using plant-level census data, we find that incentives to engage in earnings-per-share-motivated buybacks result in lower productivity at both the plant and firm level. We attribute this productivity drop to two mechanisms: reduced investment in productivity-augmenting technology, and inefficient allocation of resources across a firm’s plants. We identify multiple frictions—including labor unions, financial constraints, agency problems, and adjustment costs—that can constrain efficient reallocations across plants and thus exacerbate the consequences of firms’ short-term incentives.

Suggested Citation

  • Heitor Almeida & Nuri Ersahin & Vyacheslav Fos & Rustom M Irani & Mathias Kronlund, 2026. "How Do Short-Term Incentives Affect Long-Term Productivity?," The Review of Financial Studies, Society for Financial Studies, vol. 39(1), pages 114-157.
    • Handle: RePEc:oup:rfinst:v:39:y:2026:i:1:p:114-157.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhae064
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    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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