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Prof. Jesse M. Fried

Harvard Law School, USA

Author: Jesse M. Fried

Abstract: This paper critically re-examines a pervasive view in corporate governance: that firms should favor long-term shareholders over short-term shareholders. At the heart of this view is a strongly-held intuition that managers serving long-term shareholders will generate more economic value over time than managers serving short-term shareholders. But this intuition, I show, is faulty. Long-term shareholders, like short-term shareholders, can benefit from corporate decisions that destroy value. Indeed, long-term shareholders may well benefit more from value-destroying decisions than short-term shareholders. Favoring long-term shareholders could thus reduce, rather than increase, the value generated by a firm over time.

Key words: corporate governance, short-termism, short-term shareholders, long-term shareholders, agency costs, earnings manipulation, managerial myopia, share repurchases, open market repurchases, acquisitions, seasoned equity offerings, real earnings management

JEL Codes: G32, G34, G35, G38, K22

Full Text:  “The Uneasy Case for Favoring Long-Term Shareholders”