Corporate Short-Termism and Intertemporal Choice

Abstract

This paper presents an intertemporal model of short-termism. Critics have portrayed short-termism in broad brushstrokes as the bane of corporate governance. This paper shows that from a financial perspective short-termism does not have a self-evident, efficiency-based normative value. It applies a well-accepted asset valuation theory to demonstrate that short-termism is not per se inefficient. Intuition suggests that if profitable enough, a short-term strategy would be better than a longterm strategy. The model demonstrates this intuition to be a mathematical and financial truth. Several generalizable observations result therefrom. The model is tested in a case study of Air Products and Chemicals, Inc. v. Airgas, Inc., the most prominent and legally significant Delaware hostile takeover battles in recent years. Short-termism was a key fact in the court’s legal analysis of the target’s poison pill defense. For unique reasons, the case enables a counterfactual analysis of the financial returns based on the target’s intertemporal strategic choices and the time horizons of shareholders. The choice of the short-term is contextual; the outcomes therefrom can result in random errors or rational outcomes. It can also result in a systemic social problem, but only when two levels of market inefficiency coexist: the corporate market is systemically biased in intertemporal decisions, and the capital market is inefficient in incorporating this bias into stock prices. These conditions are special, occurring only infrequently. They are intrinsic qualities of a market bubble. This paper precisely defines the conditions in which short-termism can become a social problem.

Keywords: Short-Termism, Shareholder Activism, Hedge Funds

JEL Classification: k22