Short-Termism, the Financial Crisis, and Corporate Governance
University of San Diego School of Law
February 16, 2012
Journal of Corporation Law, Vol. 37, p. 264, 2011
San Diego Legal Studies Paper No. 12-078
This article is a comprehensive exploration of why financial and nonfinancial firms engage in short-termism with particular attention given to the financial crisis of 2007-2009. Short-termism, which is also referred to as earnings management (or, alternatively, managerial myopia), consists of the excessive focus of corporate managers, asset managers, investors and analysts on short-term results, whether quarterly earnings or short-term portfolio returns, and a repudiation of concern for long-term value creation and the fundamental value of firms. This article examines market and internal firm dynamics that contribute to short-termism, which requires an examination of various structural, informational, behavioral and incentive problems operating within firms and markets. This article also discusses various regulatory responses to mitigate short-termism, including provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. It is the objective of this article to seek changes that would improve our financial system and prevent a financial meltdown in the future, such as the financial crisis of 2007-2009 that has had such a devastating impact on the U.S. and global economies.
Number of Pages in PDF File: 101
Keywords: short-termism, financial crisis, corporate governance, earnings management, myopia, momentum reading, high frequency trading, short-term trading, transient institutional investors, shareholder voting rights, herding, corporate culture, Frank-Dodd, shadow banking system, subprime mortgages
JEL Classification: G18, G38, K22, K29, M14, M40
Date posted: February 16, 2012
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