Optimal Short-Termism

2021 ◽  
Author(s):  
Dirk Hackbarth ◽  
Alejandro Rivera ◽  
Tak-Yuen Wong
Keyword(s):  
Real Option ◽  
Asymmetric Effect ◽  
Short Term ◽  
Dynamic Contracting ◽  
Economic Significance ◽  
Endogenous Default ◽  
Ex Post ◽  
Growth Prospects ◽  
Short Termism

This paper develops a dynamic contracting (multitasking) model of a levered firm. In particular, the manager selects long-term and short-term efforts, and shareholders choose optimal debt and default policies. Excessive short-termism ex post is optimal for shareholders because debt has an asymmetric effect: shareholders receive all gains from short-term effort but share gains from long-term effort. We find that grim growth prospects and shareholder impatience imply higher optimal levels of short-termism. Also, an incentive cost effect and a real option effect create nontrivial patterns for the endogenous default threshold. Finally, we quantify agency costs of excessive short-termism, which underscore the economic significance of our results. This paper was accepted by Gustavo Manso, finance.

Hidden “holes” in the capital of banks and the supply of credit to the real sector of economy

2018 ◽  
pp. 49-68 ◽  
Author(s):  
M. E. Mamonov
Keyword(s):  
Credit Risk ◽  
The Other ◽  
Real Sector ◽  
Capital Management ◽  
Loan Loss ◽  
Short Term ◽  
The Real ◽  
Ex Post ◽  
The One

Our analysis documents that the existence of hidden “holes” in the capital of not yet failed banks - while creating intertemporal pressure on the actual level of capital - leads to changing of maturity of loans supplied rather than to contracting of their volume. Long-term loans decrease, whereas short-term loans rise - and, what is most remarkably, by approximately the same amounts. Standardly, the higher the maturity of loans the higher the credit risk and, thus, the more loan loss reserves (LLP) banks are forced to create, increasing the pressure on capital. Banks that already hide “holes” in the capital, but have not yet faced with license withdrawal, must possess strong incentives to shorten the maturity of supplied loans. On the one hand, it raises the turnovers of LLP and facilitates the flexibility of capital management; on the other hand, it allows increasing the speed of shifting of attracted deposits to loans to related parties in domestic or foreign jurisdictions. This enlarges the potential size of ex post revealed “hole” in the capital and, therefore, allows us to assume that not every loan might be viewed as a good for the economy: excessive short-term and insufficient long-term loans can produce the source for future losses.

AASB 138: catalyst for managerial decisions reducing R&D spending?

2016 ◽  
Vol 14 (1) ◽  
pp. 116-130
Author(s):  
Natasja Steenkamp ◽  
Shaun Steenkamp
Keyword(s):  
Design Methodology ◽  
Short Term ◽  
Content Type ◽  
Listed Firms ◽  
Managerial Decisions ◽  
Australian Economy ◽  
Earnings Targets ◽  
Research Intensity ◽  
Short Termism

Purpose This paper aims to investigate if the more stringent requirements of AASB 138, effective 1 January 2005, regarding capitalising research and development (R&D) spending could have been a catalyst for changes in managerial decisions that consequently resulted in reduced R&D spending in Australian companies. Design/methodology/approach Financial data of 31 Australian listed firms for financial years from 2001 to 2010 were used. Companies were classified as either capitalisers or non-capitalisers. A regression model was used to ascertain whether managers reduced R&D spending to manage earnings to attain short-term goals. Also, the research intensity ratios were calculated to determine trends in R&D spending of the two groups. Findings The pursuit of choosing short-term earnings targets to the detriment of long-term returns is referred to as short-termism. This study found a marked increase in the significance of short-termism in explaining changes in R&D of capitalisers before 2005. Furthermore, the median research intensity ratio of capitalisers declined almost three times that of non-capitalisers after the introduction of AASB 138. These findings suggest that AASB 138 could have been a catalyst for changes in managerial decisions in pursuit of short-termism, resulting in reduced R&D spending as a means to manage earnings. Originality/value This study is useful to standard setters and board of directors as it alerts them about the potential adverse effect AASB 138 might have on the survivability and competitiveness of Australian companies and hence the Australian economy.

scholarly journals Capital Structure and Investment Growth Opportunity of Listed Pharmaceutical Firms in Nigeria

2017 ◽  
Vol 2 (1) ◽  
pp. 50
Author(s):  
Shehu Usman Hassan ◽  
Joseph Aitimon
Keyword(s):  
Capital Structure ◽  
Stock Exchange ◽  
Investment Opportunity ◽  
Short Term ◽  
Pharmaceutical Firms ◽  
Ex Post ◽  
Growth Opportunity ◽  
Investment Growth ◽  
The Impact

This study assesses the impact of capital structure on investment opportunity growth, using listed pharmaceutical firms in Nigeria. The main objective of the study is to ascertain the level to which capital structures influences the investment opportunity growth of listed pharmaceutical firms in Nigeria. The methodology employed is the use of secondary data and the ex-post facto research design. The population of the study is all 7 pharmaceutical firms listed on the Nigerian Stock Exchange as at 31st December, 2013. The study used regression as a tool of analysis. Findings show that Short term debt, total debt and performance were found to have significant, negative and strong effect on investment growth opportunity of Listed Pharmaceutical firms in Nigeria, while long term debt have no effect on investment growth opportunity of Listed Pharmaceutical firms in Nigeria, within the sturdy period. The study recommends that pharmaceutical firms should maintain a minimal level of short term debt because tying down too much of it current assets will reduce investment opportunity, also the management of listed Pharmaceutical firm should increase the level at which the organization uses long term debt to finance its business activities, as this may go a long way in increasing the investment opportunity potentials of the organizations, we also recommend that mmanagement should reduce the combination of its short term debt and long term debt and channel such to a highly profitable investment so that so that it will encourage them to invest more in other business opportunity that will bring more fortune to the business and shareholders at largemore room.

scholarly journals Long-Term Bias and Director Primacy

2021 ◽  
Vol 2020 (3) ◽  
Author(s):  
Stephen M. Bainbridge
Keyword(s):  
Judicial Review ◽  
Short Term ◽  
Recent Contribution ◽  
Corporate Managers ◽  
Business Judgment Rule ◽  
Judicial Intervention ◽  
The Board Of Directors ◽  
Directors And Officers ◽  
Short Termism

In an important recent contribution to the short-termism debate, Professors Michal Barzuza and Eric Talley challenge what they call an “emerging consensus in certain legal, business, and scholarly communities . . . that corporate managers are pressured unduly into chasing short-term gains at the expense of superior long-term prospects.” See Michal Barzuza & Eric Talley, Long-Term Bias, 2020 COLUM. BUS. L. REV. 104. Instead, Barzuza and Talley contend that “corporate managers often fall prey to long-term bias—excessive optimism about their own long-term projects.” This article is an invited comment on Barzuza and Talley’s article. Subject to various quibbles raised herein, I broadly concur with Barzuza and Talley’s argument that corporate directors and officers can be biased towards long-term projects and, accordingly, may reject short-term projects offering higher returns. But what law reforms follow logically from their conclusion, if any? With respect to judicial review, I want to differ with Barzuza and Talley on three points. First, I believe Barzuza and Talley overstate the risk of judicial intervention. Second, they fail adequately to distinguish between directors and managers, even though that distinction is central to the application of Delaware law. Third, I believe their analysis implies that judges should retain the deference to director decisionmaking inherent in doctrines such as the business judgment rule and intermediate review. With respect to encouraging shareholder activism, I argue that the responsibility for policing managerial hyperopia (or myopia, for that matter) should be assigned to the board of directors, not the shareholders. Heterogenous shareholders lack the proper incentives and knowledge to properly police management.

scholarly journals Modelling the Symmetrical and Asymmetrical Effects of Global Oil Prices on Local Food Prices: A MENA Region Application

2021 ◽  
Author(s):  
Hadj Cherif Houda ◽  
Zhenling Chen ◽  
Guohua Ni
Keyword(s):  
Saudi Arabia ◽  
United Arab Emirates ◽  
Positive Impact ◽  
Oil Prices ◽  
Food Prices ◽  
Test Results ◽  
Asymmetric Effect ◽  
Short Term ◽  
Mena Region

Abstract This paper explores the complex nexus between the global oil prices and the food prices of Middle East and North Africa (MENA) region during the period 2000–2020. Both linear and nonlinear models of the autoregressive distributed lag (ARDL) approach are adapted into panel data form to investigate the symmetrical and asymmetrical influence of oil prices on food prices. The key results are summarized: i) The effect of oil prices on food prices is significantly positive including both oil-exporting and oil-importing nations are verified in the long-term. The positive impact on oil-exporters—due to higher oil revenues—is greater than importing nations, leading to an increased demand for food. Additionally, the effect on oil-exporters is negative and significant in the short-term but not significant for importers. ii) The panel analysis for the MENA sample confirms the presence of negative short-term asymmetric behaviour, while in the long-term, the asymmetric effect is positive, indicating that food prices increase regardless of fluctuations in oil prices. iii) Wald test results support asymmetric co-integration for the whole sample of the MENA due to the heterogeneous response within the oil-importing and exporting samples. Specifically, the non-linear ARDL test results affirm the absence of an asymmetric nexus among oil and food prices for oil-exporting group (including Saudi Arabia, Saudi Arabia, United Arab Emirates) and Tunisia within the oil-importing group. Although there are differences in the direction and degree, the food prices of other countries are asymmetric to the oil price. This study provides recommendations that are useful to MENA countries to establish a stable mechanism for oil and food prices to ensure food security in the region.

On the Effects of Restricting Short-Term Investment

2019 ◽  
Vol 33 (1) ◽  
pp. 1-43 ◽  
Author(s):  
Nicolas Crouzet ◽  
Ian Dew-Becker ◽  
Charles G Nathanson
Keyword(s):  
Rational Expectations ◽  
Short Term ◽  
Policy Makers ◽  
Oxford University ◽  
Short And Long Term ◽  
Editorial Decision ◽  
Short Term Investment ◽  
Short Termism ◽  
Published Paper

Abstract We study the effects of policies proposed to address “short-termism” in financial markets. We examine a noisy rational expectations model in which investors’ exposures and information about fundamentals endogenously vary across horizons. In this environment, taxing or outlawing short-term investment doesn’t negatively affect the information in prices about long-term fundamentals. However, such a policy reduces short- and long-term investors’ profits and utility. Changing policies about the release of short-term information can help long-term investors—an objective of some policy makers—at the expense of short-term investors. Doing so also makes prices less informative and increases costs of speculation. Received June 24, 2018; editorial decision February 19, 2019 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Long horizon institutional investors and the relation between missing quarterly analyst forecasts and CEO turnover

2019 ◽  
Vol 27 (2) ◽  
pp. 190-223
Author(s):  
Juan Wang
Keyword(s):  
Institutional Investors ◽  
Institutional Ownership ◽  
Ceo Turnover ◽  
Career Concerns ◽  
Analyst Forecast ◽  
Positive Relation ◽  
Short Term ◽  
Content Type ◽  
Short Termism

Purpose The purpose of this paper is to investigate the effect of long horizon institutional ownership on CEO career concerns to meet the short-term earnings benchmark. Design/methodology/approach Using a sample of 10,565 firm-year observations in the USA, the paper examines the extent to which long horizon institutional investors mitigate the positive relation between CEO turnover and missing the quarterly consensus analyst forecast. Findings After controlling for the general performance-turnover relation, this paper finds that long horizon institutional investors mitigate the positive relation between CEO turnover and missing the quarterly consensus analyst forecast. This finding is stronger when CEOs focus on long-term value creation and do not sacrifice long-term value to boost current earnings and is stronger when the monitoring intensity by long horizon institutional investors is greater. Research limitations/implications The results suggest that long horizon institutional investors serve a monitoring role in alleviating CEO career concerns to meet the short-term earnings benchmark. Originality/value This paper contributes to the literature on the relation between long horizon institutional ownership and attenuated managerial short-termism. The literature is silent about why long horizon institutional investors alleviate managerial short-termism. This paper fills this void in the literature by documenting that long horizon institutional investors mitigate CEO career concerns for managerial short-termism. Moreover, this paper contributes to the literature on the monitoring role of institutional investors by documenting the incremental effect of institutional ownership on CEO career concerns to meet the short-term earnings benchmark.

scholarly journals The Role of Carbon Accountant in Corporate Carbon Management Systems: A Holistic Approach

2017 ◽  
Vol 1 (2) ◽  
pp. 90 ◽  
Author(s):  
Francis Chinedu Egbunike ◽  
Ochuko Benedict Emudainohwo
Keyword(s):  
Carbon Accounting ◽  
Management Systems ◽  
Primary Data ◽  
Corporate Management ◽  
Accounting System ◽  
Manufacturing Companies ◽  
Short Term ◽  
Ex Post

Carbon accounting consists of a combination of advanced cost allocation techniques such as activity-based management and life-cycle costing; that improve the identification and assignments of carbon-related expenses and overheads to such objects as products, services, customers and organizational processes. The study therefore sets out to find the role of carbon accountant in corporate management systems. Data used for this investigation were collected from primary and secondary sources. Primary data are first-hand information from respondents while Secondary data include textbook, Annual Reports and financial statements and internet facilities. The study employed descriptive survey and ex-post facto research design and the formulated hypotheses were tested by use of T-Test and OLS Regression. Based on the analysis and the hypothesis tested, it showed that there is a statistically significant relationship between carbon accounting and corporate performance of selected quoted Manufacturing Companies and based on this findings, it was recommended amongst others that, adaptation to conditions that include long-term changing dynamics of the natural environment should be encouraged and the focus of finance and accounting system should not only cover short-term outcomes and management of short-term costing, reporting and disclosure but also long-term climate risks.

Corporate Short-Termism

2016 ◽  
Author(s):  
Mark J. Roe
Keyword(s):  
Economic Policy ◽  
Stock Market ◽  
Corporate Law ◽  
Managerial Compensation ◽  
Short Term ◽  
Compensation Packages ◽  
Management Policies ◽  
Short Termism

In this chapter I examine whether short-termism in stock markets justifies using corporate law to further shield managers and boards from shareholder influence, to allow boards and managers to pursue their view of sensible long-term strategies in their investment and management policies even more freely. First, the evidence that on stock market short-termism is mixed and inconclusive, with managerial mechanisms under-rated sources of short-term distortions, including managerial compensation packages whose duration often is shorter than that of institutional stockholding; further insulating boards from markets would exacerbate these managerial short-term-favoring mechanisms. Nor are courts well positioned to make this kind of basic economic policy, which if serious is better addressed with policy tools unavailable to courts.

scholarly journals Exchange Rate, Exchange Rate Volatility and Stock Prices: An Analysis of the Symmetric and Asymmetric Effect Using ARDL and NARDL Models

2021 ◽  
Vol 15 (4) ◽  
pp. 179-190
Author(s):  
La Ode Saidi ◽  
Abd Azis Muthalib ◽  
Pasrun Adam ◽  
Wali Aya Rumbia ◽  
La Ode Arsad Sani
Keyword(s):  
Exchange Rate ◽  
Stock Prices ◽  
Stock Price ◽  
Time Series Data ◽  
Exchange Rate Volatility ◽  
Series Data ◽  
Asymmetric Effect ◽  
Short Term ◽  
Symmetry Effect

This article examined the symmetric and asymmetric effects of the IDR/USD exchange rate and its volatility on stock prices using the monthly time series data of the IDR/USD exchange rate and the Indonesian composite stock price index from January 2006 to July 2019. The data were analyzed using ARDL and NARDL models. The results showed that in the short term, the IDR/USD exchange rate has a symmetry effect on stock prices, while volatility lacks such a symmetric influence. However, these two variables asymmetrically affect stock prices, Furthermore, in the long term both the exchange rate and the volatility lack symmetric and asymmetric influence on stock prices.

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