Working Paper: CEPR ID: DP13894
Authors: Heitor Almeida; Nuri Ersahin; Vyacheslav Fos; Rustom M. Irani; Mathias Kronlund
Abstract: Previous research shows that stock repurchases that are caused by earnings management lead to reductions in firm-level investment and employment. It is natural to expect firms to cut less productive investment and employment first, which could lead to a positive effect on firm-level productivity. However, using Census data, we find that firms make cuts across the board irrespective of plant productivity. This pattern seems to be associated with frictions in the labor market. Specifically, we find evidence that unionization of the labor force may prevent firms from doing efficient downsizing, forcing them to engage in easy or expedient downsizing instead. As a result of this inefficient downsizing, EPS-driven repurchases lead to a reduction in long-term productivity.
Keywords: productivity; employment; labor unions; investment; shorttermism; share repurchases
JEL Codes: G32; G35; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stronger incentives to boost shortterm performance (M52) | Cuts in investments (G31) |
| Stronger incentives to boost shortterm performance (M52) | Cuts in employment (J63) |
| Stronger incentives to boost shortterm performance (M52) | Drop in firm-level productivity (D29) |
| Cuts in investments (G31) | Lower long-term productivity (O49) |
| Cuts in employment (J63) | Lower long-term productivity (O49) |
| Inefficient downsizing practices (L25) | Cuts in investments and employment (E22) |
| Labor unions constrain efficient downsizing (J51) | Inefficient downsizing practices (L25) |