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

48 Pages Posted: 6 Mar 2012

See all articles by Jaakko Aspara

Jaakko Aspara

Hanken School of Economics; Aalto University School of Business (formerly known as Helsinki School of Economics)

Kalle Pajunen

University of Tampere - Department of Management Studies

Henrikki Tikkanen

Aalto University - Department of Marketing and Management

Risto Tainio

Aalto University

Date Written: March 5, 2012

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.

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

Suggested Citation

Aspara, Jaakko and Pajunen, Kalle Tapani and Tikkanen, Henrikki and Tainio, Risto, Explaining Corporate Short-Termism? Self-Reinforcing Processes and Biases Among Investors, Media, and Corporate Managers (March 5, 2012). Available at SSRN: https://ssrn.com/abstract=2016179 or http://dx.doi.org/10.2139/ssrn.2016179

Jaakko Aspara (Contact Author)

Hanken School of Economics ( email )

P.O. Box 479
Helsinki, Helsinki 00101
Finland

Aalto University School of Business (formerly known as Helsinki School of Economics) ( email )

P.O. Box 21230
Helsinki, 00076
Finland

Kalle Tapani Pajunen

University of Tampere - Department of Management Studies ( email )

Tampere, FIN-33101
Finland

Henrikki Tikkanen

Aalto University - Department of Marketing and Management ( email )

P.O. Box 1210
Helsinki, FIN-00101
Finland

Risto Tainio

Aalto University ( email )

P.O. Box 11000
Aalto, FI-00076
Finland

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