Paper Abstract
1066. Mark J. Roe & Federico Cenzi Venezze, Will Loyalty Shares Do Much for Corporate Short-Termism?, 07/2021; forthcoming in Business Lawyer, Vol. 76 (2021).
Abstract: Stock-market short-termism is, a widespread view has it, hurting the economy. Because stock markets will not support corporate long-term planning, the thinking goes, companies fail to invest enough, do not do enough research and development, and buy back too much of their stock. As a remedy to the perceived short-termism problem, an increasing number of European companies are adopting “loyalty shares,” whereby stockholders who own their stock for longer periods have more voting power than those who do not. There is a strong intuitive appeal to the idea that more votes for long-term shareholders would promote more long-term corporations. While loyalty shares are scarce in the United States, proposals to facilitate their use are emerging. We show here why loyalty shares promoters’ thinking is overly optimistic—often the central goal for users of loyalty shares will be to retain control, which need not have any beneficial impact on corporate time horizons. Other reasons may well justify loyalty-share programs. We introduce to the loyalty-share analysis the ex ante value to the entrepreneur of retaining control—i.e., loyalty shares can help motivate founders and thereby induce new entry, new start-ups, and new, original entrepreneurial activity. But the prevailing raison d’etre of diminishing short-termism seems likely to be weak or absent.