Explaining Corporate Short-Termism? Self-Reinforcing Processes and Biases Among Investors, Media, and Corporate Managers

Abstract:     
Scholars in multiple fields have been concerned about corporate managers’ potential tendency to sacrifice long-term investments to improve short-term earnings. In the extant literature, this phenomenon has often been explained by a pressure caused by the stock market. The present article presents a novel explanation to the phenomenon by explicating a set of systemic, self-reinforcing processes within and across investor, media, and corporate manager communities. These self-reinforcing processes constitute a mechanism by which these actors may have come to increasingly focus on short-term earnings. The authors propose that corporate managers’ bias of orienting corporate strategies towards maximization of short-term earnings is, at least partly, a result of systemic, self-reinforcing processes between and within the communities of actors (investors, media, managers). In other words, corporate short-termism is not due to inherent preference of investors or any other actors to focus on short-term earnings. The stock market pressure for short-termism is also suggested to involve perceptual biases, including bias caused by media reports. The systemic perspective offered by the article is novel to the study of corporate short-termism, and questions conventional assumptions about the roots of this phenomenon. The study reminds to corporate managers that ostensible pressure towards short-termism may not be fully “real”, but may instead be caused by various perceptual and behavioral biases that constitute self-reinforcing loops.

Number of Pages in PDF File: 48

Keywords: corporate cgovernance, corporate short-termism, long-term vs short-term, long-term investments, earnings, investors, managerial myopia

working papers series