The Uneasy Case for Favoring Long-Term Shareholders

This Article 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. I show, however, that this intuition 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.