Long-Term Bias

56 Pages Posted: 1 Mar 2019 Last revised: 7 Mar 2019

See all articles by Michal Barzuza

Michal Barzuza

University of Virginia School of Law

Eric L. Talley

Columbia University - School of Law

Date Written: February 20, 2019

Abstract

An emerging consensus in certain legal, business, and scholarly communities maintains that corporate managers are pressured unduly into chasing short-term gains at the expense of superior long-term prospects. The forces inducing managerial myopia are easy to spot, typically embodied by activist hedge funds and Wall Street gadflies with outsized appetites for next quarter’s earnings. Warnings about the dangers of “short termism” have become so well established, in fact, that they are now driving changes to mainstream practice, as courts, regulators and practitioners fashion legal and transactional constraints designed to insulate firms and managers from the influence of investor short-termism. This Article draws on academic research and a series of case studies to advance the thesis that the emergent folk wisdom about short-termism is incomplete. A growing literature in behavioral finance and psychology now provides sound reasons to conclude that corporate managers often fall prey to long-term bias—excessive optimism about their own long-term projects. We illustrate several plausible instantiations of such biases using case studies from three prominent companies where managers have arguably succumbed to a form of “long-termism” in their own corporate stewardship. Unchecked, long-termism can impose substantial costs on investors that are every bit as damaging as short-termism. Moreover, we argue that long-term managerial bias sheds considerable light on the paradox of why short-termism evidently persists among supposedly sophisticated financial market participants: Shareholder activism—even if unambiguously myopic—can provide a symbiotic counter-ballast against managerial long-termism. Without a more definitive understanding of the interaction between short- and long-term biases, then, policymakers should be cautious about embracing reforms that focus solely on half of the problem.

Keywords: Short-termism; long-termism; Managerial overconfidence; Activists hedge funds; Dividends; Buybacks; Behavioral finance

JEL Classification: G02; G30; G32; G34; K22; M20

Suggested Citation

Barzuza, Michal and Talley, Eric L., Long-Term Bias (February 20, 2019). Virginia Law and Economics Research Paper No. 2019-05. Available at SSRN: https://ssrn.com/abstract=3338631 or http://dx.doi.org/10.2139/ssrn.3338631

Michal Barzuza (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Eric L. Talley

Columbia University - School of Law ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.erictalley.com

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