Empirical Evidence for Stock-Market Short-Termism?

This blog post is part of a larger series on stock-market “short-termism”. See also my entries onshare buybacks and progressivecorporate governance reforms.I. IntroductionTo recapitulate the “myopia thesis”: managers of publicly traded firms are hostage to diversified shareholders who forego careful study of the firm’s fundamentals and instead respond to the latest, easily digestible quarterly earnings report. Rather than undertaking investments that might have a substantial retu rn down the road, managers mimic the priorities of transient shareholders uninterested in a firm’s long-term strategy. Future-oriented firms that resist this temptation will find it more difficult to raise capital. This will then jeopardize their ability to survive long enough to reap the returns from long-term investments. The myopia hypothesis predicts that: 1) stock markets undervalue firms that sacrifice short-term profitability for longer-term growth 2) firms will therefore rationally forego long-term investments such as research and development (R&D) and capital expenditures (CAPEX). In this post, I will critically examine the evidence for such claims.II. Profits, P/E Ratios and IPOsSeveral economic indicators challenge the first pillar of short-termism thesis. In a recent NBER working paper, Steve Kaplan contrasts the early predictions of the myopia theorists in the 1980s with subsequent trends in corporate profits. If the short-termists of yesterday had been correct, the earnin...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs