DOES A LONG-TERM ORIENTATION CREATE VALUE? EVIDENCE FROM A REGRESSION DISCONTINUITY

Research summary: 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 (1) an increase in firm value and operating performance-suggesting that a long-term orientation is beneficial to companies-and (2) 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. Managerial summary: This paper shows that corporate short-termism is hampering business success. We show clear, causal evidence that imposing long-term incentives on executives-in the form of long-term executive compensation-improves business performance. Long-term executive compensation includes restricted stocks, restricted stock options, and long-term incentive plans. Firms that adopted shareholder resolutions on long-term compensation experienced a significant increase in their stock price. This stock price increase foreshadowed an increase in operating profits that materialized after two years. We unpack the reasons for these improvements in performance, and find that firms that adopted these shareholder resolutions made more investments in R&D and stakeholder engagement, especially pertaining to employees and the natural environment. Copyright (C) 2016 John Wiley & Sons, Ltd.