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.

Assessing the Political Environment for Business: A New Role for Political Scientists?

1982 ◽  
Vol 15 (02) ◽  
pp. 180-186 ◽  
Author(s):  
Joseph LaPalombara
Keyword(s):  
Risk Analysis ◽  
Multinational Corporations ◽  
Political Risk ◽  
Political Environment ◽  
Short Term ◽  
Corporate Managers ◽  
The Past ◽  
Future Events ◽  
To Come

Political scientists are only now, and dimly, beginning to recognize that something called “political risk analysis” (PRA) is very much in vogue in the corporate and banking communities of this country. Any attempt to assess this uncommon development should begin with this question: Why would any banker or corporate manager wish to spend hard cash on anything political scientists might have to say about places overseas where banks and multinational corporations lend or invest their capital? After all, the profession is not exactly distinguished by its ability to make accurate forecasts. Indeed, Sartori has argued that political scientists ought to eschew forecasting entirely in that they are best able to explain what happened as opposed to what may come to pass.Sartori's assertion of course would make historians of us all—and burden us with the historian's smug claim that, if the history examined is too recent, the immediacy of events will distort our vision and bias our judgments. Thus, rather than try to foretell where, say, Germany will move politically next year we should expend (more!) of our resources to establish once and for all what really caused Weimar to collapse and Hitler to come to power.This is not the stuff of political risk analysis. Growing interest in this activity is little based on broad analyses of the past or on long-term forecasts of future events. The potential consumers of political assessments are intelligent, harried bankers and corporate managers who are pressed to make relatively short-term decisions that affect the viability of enterprise and investment-and, equally important, careers-in professions where tenure is unknown.

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.

Potential Functional and Dysfunctional Effects of Continuous Monitoring (Retracted)

2008 ◽  
Vol 83 (6) ◽  
pp. 1551-1569 ◽  
Author(s):  
James E. Hunton ◽  
Elaine G. Mauldin ◽  
Patrick R. Wheeler
Keyword(s):  
Internal Control ◽  
Continuous Monitoring ◽  
Internal Audit ◽  
Theory And Practice ◽  
Short Term ◽  
Corporate Managers ◽  
Managerial Decisions ◽  
Monitoring Frequency ◽  
Research Findings

ABSTRACT: The trend toward continuous monitoring of automated business transactions by the internal audit function is growing as organizations seek to improve internal control. In this study, we demonstrate that continuous monitoring and the time horizon over which performance-contingent incentives are based can interact, thereby yielding potential functional and dysfunctional effects on managerial decisions. Seventy-two experienced corporate managers completed a between-participants experiment that randomized monitoring frequency (periodic or continuous) and incentive horizon (short-term or long-term). We found that earnings management of real activities significantly decreased as the frequency of monitoring increased in the presence of a short-term incentive horizon—a functional effect. However, with a long-term incentive horizon, the participants’ willingness to change the current level of investment in a risky but viable project significantly dropped as the frequency of monitoring increased, even though additional investment would enhance the likelihood of the project’s eventual success—a dysfunctional effect. We also observed that more frequent monitoring significantly decreased the willingness of managers to continue with a risky but viable project regardless of incentive horizon and the effect was significantly pronounced in the presence of a short-term, relative to long-term, incentive horizon—another dysfunctional consequence. Implications of the research findings to theory and practice are discussed.

scholarly journals Long-Term Bias

2020 ◽  
Vol 2020 (1) ◽  
Author(s):  
Michal Barzuza ◽  
Eric Talley
Keyword(s):  
Case Studies ◽  
Behavioral Finance ◽  
Hedge Funds ◽  
Wall Street ◽  
Corporate Managers ◽  
Market Participants ◽  
Folk Wisdom ◽  
Earnings Warnings ◽  
Short Termism

An emerging consensus in certain legal, business, and scholarly communities maintains that corporate managers are pressured unduly into chasing short-term gains at the expense of superior long-term prospects. The forces inducing manage- rial myopia are easy to spot, typically embodied by activist hedge funds and Wall Street gadflies with outsized appetites for current quarterly earnings. Warnings about the dangers of “short termism” have become so well established, in fact, that they are now driving changes to mainstream practice as courts, regulators and practitioners fashion legal and transactional constraints designed to insulate firms and managers from the influence of investor short-termism. This Article draws on ac- ademic research and a series of case studies to advance the the- sis that the emergent folk wisdom about short-termism is in- complete. A growing literature in behavioral finance and psychology now provides sound reasons to conclude that corpo- rate managers often fall prey to long-term bias—excessive op- timism about their own long-term projects. We illustrate sev- eral plausible instantiations of such biases using case studies from three prominent companies where managers have argua- bly succumbed to a form of “long-termism” in their own corpo- rate stewardship. Unchecked, long-termism can impose sub- stantial costs on investors that are every bit as damaging as short-termism. Moreover, we argue that long-term managerial bias sheds considerable light on the paradox of why short- termism evidently persists among supposedly sophisticated fi- nancial market participants: shareholder activism—even if unambiguously myopic—can provide a symbiotic counter-bal- last against managerial long-termism. Without a more defini- tive understanding of the interaction between short- and long- term biases, then, policymakers should be cautious about em- bracing reforms that focus solely on half of the problem.

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.

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.

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.

Whose side are you on?

2017 ◽  
Author(s):  
Graeme Guthrie
Keyword(s):  
Board Of Directors ◽  
Bargaining Power ◽  
Fiduciary Duty ◽  
Senior Executives ◽  
Short Term ◽  
Strong Ties ◽  
Governance Practices ◽  
The Board Of Directors ◽  
Lock In

The board of directors has a fiduciary duty to the shareholders who elect its members to monitor, advise, and if necessary replace the CEO and other senior executives. One way to analyze the interactions between boards and executives is as an ongoing series of bargaining games. Strong ties can develop between directors and executives, which affect the bargaining power of the various participants. Short-term changes in bargaining power can lead to negotiated changes in board composition that lock in the altered bargaining power for the long term. This chapter uses Ray Irani’s tenure as CEO of Occidental Petroleum to describe the bargaining game interpretation of board-CEO interactions and to demonstrate how this framework can explain many observed corporate governance practices.

scholarly journals Does Short-Termism Influence the Market Value of Companies? Evidence from EU Countries

2020 ◽  
Vol 13 (11) ◽  
pp. 272
Author(s):  
Małgorzata Janicka ◽  
Aleksandra Pieloch-Babiarz ◽  
Artur Sajnóg
Keyword(s):  
Stock Exchange ◽  
Market Value ◽  
Negative Effects ◽  
Public Companies ◽  
Corporate Managers ◽  
Eu Member States ◽  
Reporting Frequency ◽  
Short Time ◽  
Short Termism

This paper fits into the stream of current research on the concept of short-termism and its importance for economic sustainability, especially sustainable finance. Short-termism focuses on short time horizons by both corporate managers and the financial markets, and prioritizes short-time shareholder return over the long-term growth of the company’s value. This study engages the short-termism discussion by examining the effect of quarterly reporting on the long-term market value of listed companies. The aim of the article is to determine whether European companies experience the negative effects of short-termism, precisely, whether public companies that prepare quarterly reports, and which focus mainly on achieving the short-term goals of stock exchange investors, are seeing a decline in their market value in the long-term. We have not proven the existence of such a dependence, the increase in reporting frequency of public companies does not contribute to a decline in their long-term market value. In the case of the EU-15 the results of regression model estimation indicate a positive and statistically significant impact of the time of regular quarterly reporting on the buy-and-hold rates of return, in the “new” EU member states this relationship is not observed.

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