Does a Long-Term Orientation Create Value? Evidence from a Regression Discontinuity

Authors

Caroline Flammer, Boston University
Pratima Bansal, Ivey Business School

Document Type

Article

Publication Date

12-2016

Volume

38

Issue

9

Journal

Strategic Management Journal

First Page

1827

URL with Digital Object Identifier

https://doi.org/10.1002/smj.2629

Last Page

1847

Abstract

In this paper, we theorize and empirically investigate how a long-term orientation impacts firm value. To study this relationship, we exploit exogenous changes in executives’ long-term incentives. Specifically, we examine shareholder proposals on long-term executive compensation that pass or fail by a small margin of votes. The passage of such “close call” proposals is akin to a random assignment of long-term incentives and hence provides a clean causal estimate. We find that the adoption of such proposals leads to i) an increase in firm value and operating performance―suggesting that a long-term orientation is beneficial to companies―and ii) an increase in firms’ investments in long-term strategies such as innovation and stakeholder relationships. Overall, our results are consistent with a “time-based” agency conflict between shareholders and managers.

Notes

This article is an author accepted version. The final published version can be found at https://doi.org/10.1002/smj.2629