Short-Termism, the Financial Crisis, and Corporate Governance

Journal of Corporation Law, Vol. 37, p. 264, 2011

San Diego Legal Studies Paper No. 12-078

101 Pages Posted: 16 Feb 2012  

Lynne Dallas

University of San Diego School of Law

Date Written: February 16, 2012

Abstract

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.

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

Suggested Citation

Dallas, Lynne, Short-Termism, the Financial Crisis, and Corporate Governance (February 16, 2012). Journal of Corporation Law, Vol. 37, p. 264, 2011; San Diego Legal Studies Paper No. 12-078. Available at SSRN: https://ssrn.com/abstract=2006556

Lynne Dallas (Contact Author)

University of San Diego School of Law ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

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