Customer Capital and the Aggregate Effects of Short-Termism

59 Pages Posted: 20 Sep 2023

Date Written: August 30, 2023

Abstract

Managers face continuous pressure to meet short-term forecasts and targets, which can potentially impact firms’ investments in customer capital and pricing decisions. Using data on U.S. public companies together with IBES analysts’ forecasts, we find that firms that just meet analysts’ profit forecasts have an average markup growth of 0.8% higher than firms that just miss targets, suggesting opportunistic markup manipulation.

To assess the aggregate economic implications of short-termism, we develop and estimate a quantitative firm-heterogeneity model that incorporates short-term frictions and endogenous markups resulting from customer accumulation. In the model, short-termism arises optimally to offset manager’s private incentives, resulting in higher markups and lower customer capital stock.

We find that, on average, firms increase markups by 8% due to short-termism, generating $38 millions of additional annual profits. At the macro level, the distortion reduces consumers’ welfare by 4% and lowers the annual total market capitalization by $3.1 trillions on average.

Keywords: Short-termism, Agency Conflict, Markup, Customer Capital, Firm Heterogeneity

JEL Classification: E20, G30

Suggested Citation

Errico, Marco and Lavia, Alessandro Dario and Pollio, Luigi, Customer Capital and the Aggregate Effects of Short-Termism (August 30, 2023). Available at SSRN: https://ssrn.com/abstract=4557135 or http://dx.doi.org/10.2139/ssrn.4557135

Marco Errico

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alessandro Dario Lavia

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Luigi Pollio (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

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