The Uneasy Case for Favoring Long-Term Shareholders

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The Uneasy Case for Favoring Long-Term Shareholders

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Title: The Uneasy Case for Favoring Long-Term Shareholders
Author: Fried, Jesse M.
Citation: Jesse M. Fried, The Uneasy Case for Favoring Long-Term Shareholders (Harvard John M. Olin Discussion Paper Series Discussion Paper No. 795, Nov. 2014, 124 Yale L.J. 1554 (2015)).
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Abstract: This paper challenges a persistent and pervasive view in corporate law and corporate governance: that a firm’s managers should favor long-term shareholders over short-term shareholders, and maximize long-term shareholders’ returns rather than the short-term stock price. Underlying this view is a strongly-held intuition that taking steps to increase long-term shareholder returns will generate a larger economic pie over time. But this intuition, I show, is flawed. Long-term shareholders, like short-term shareholders, can benefit from managers destroying value — even when the firm’s only residual claimants are its shareholders. Indeed, managers serving long-term shareholders may well destroy more value than managers serving short-term shareholders. Favoring the interests of long-term shareholders could thus reduce, rather than increase, the value generated by a firm over time
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