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Does a Long-Term Orientation Create Value? Evidence from a Regression Discontinuity

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 i) an increase in firm value and operating performance ― suggesting that a long-term orientation is beneficial to companies ― and ii) 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.