Abstract

This paper examines, in an innovative way as compared to the literature on the subject, “whether, how and under what conditions” certain technical devices, such as so-called “loyalty bonuses,” devised to increase the holding period of shares, can effectively reach their goal of countering the short-termist tendency involved in company investment decisions. This trend is an expression of compliance toward the current short-termism of the financial market as evidenced by the enormous shortening of the average share-holding period. This is not a recent phenomenon but it becomes more marked in times of crisis. Thus many projects, although functional to a company’s competitiveness, are rejected simply because of their deferred profitability and therefore incompatibility with the short market horizon, more focused on results emerging from quarterly reports than on a company’s long-term choices for business development. If the market is unable to immediately and adequately incorporate into prices the benefits from deferred returns, shareholders can equally obtain them if they remain durably connected with the company, but this choice must be encouraged by appropriate incentives. The loyalty bonus may be useful for this purpose and for long-term company interests, because it contributes to a better alignment of shareholders’ expectations with a more long-term vision in investment strategy. However the bonus, rather than involving the minority shareholders in the enterprise’s “mission,” often degenerates into a Control Enhancing Mechanism, though with unusual effects, among which a situation of “captivity” for all shareholders, even and especially the majority shareholders. In any case the utility of the bonus can occur, especially in less efficient markets. In a fully efficient market it could be harmful.

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