What is Short-Termism?

A Wall Street Journal editorial from 30 years ago skewered the short-termism concept. In it, Drucker questioned whether short-termism is really a sustainable strategy. This article explores the evidence and the implications of this view for U.S. capital markets. Read on to find out more. Here’s what we know:

Evidence

Since the financial crisis, political figures and academics have warned against the “evidence of short-termism” in U.S. stock markets. According to them, short-termism is fueled by the demand for short-term earnings and stock price maximization rather than long-term value creation. As a result, publicly traded U.S. companies often cut back on research and development while repurchasing shares. This creates a short-term pop in a company’s stock price.

In addition, CEO compensation has been identified as an indicator of short-termism. CEO compensation consists of a mix of salary, perks, bonuses, and stock performance-based incentives. Consequently, CEOs may spend less on long-term systems and capabilities to boost their stock prices or take excessive risks in an attempt to artificially drive up their stock price. Such a situation enables CEOs to make decisions based on their short-term reward rather than long-term interests.

Implications

As we live in an increasingly volatile world, short-termism is becoming a major concern for public companies. In addition to stunting future growth, short-termism also negatively impacts wages, employment rates, and living standards. In addition to these short-term effects, short-termism can also lead to the failure of strategic decisions that would otherwise benefit long-term interests, such as investing in research and development, capital projects, and employee training.

Some companies that have fallen victim to short-termism are New Century Financial and Countrywide Financial. These companies became immensely successful because of the high volume of mortgages they sold. Their employees were encouraged to sell as many mortgages as possible. Consequently, the companies’ stock prices soared. Yet their short-term mindset led them to underweight factors that could harm their long-term prospects, such as credit risk and the possibility of a slowdown in home prices.

Impact on stakeholders

While there are many theories about the causes of corporate short-termism, most of them rely on an incomplete view of the problem. In contrast, some firms pursue a long-term strategy, while others are short-term-focused. Both can be the result of different factors combining to affect y. In this paper, we analyze the causes of short-termism and look at possible interventions that can mitigate its adverse effects on stakeholders.

In companies, excessive short-termism can distract management from corporate social responsibility and environmental issues, and can lead to a company neglecting long-term projects that may have a wider impact on society. Short-termism can also negatively impact share values in the long-run, and can exacerbate systemic risks. In fact, excessive short-termism contributed to the Global Financial Crisis. While short-termism is not necessarily bad in and of itself, it does have harmful spillover effects.

Impact on U.S. capital markets

A recent study examined the impact of short-termism on U.S. capital markets. According to the researchers, the increase in short-termism in U.S. capital markets is directly related to corporate America and its policies. Corporate law has been modified to prevent some of these bad outcomes. The study aims to provide a better understanding of this phenomenon. It also aims to identify the reasons behind short-termism in the market.

While corporate dividends and share buybacks are often used as a justification for short-termism, they are not the only cause. The fact that these companies are spending a vast majority of their income in stock buybacks and dividends suggests that they are not making investments for the long-term. This is because the cash generated by these investments is not invested in new projects.

In conclusion, short-termism is a problem because it can lead to poor decision-making, and it often trumps long-term interests. We need to find a way to discourage short-termism and promote a more long-term perspective in order to ensure the sustainability of our economy and society.