Roe’s Short-Termism Work Selected as Top Corporate and Securities Law Article

Mark Roe is the David Berg Professor of Law at Harvard Law School. Related research from the Program on Corporate Governance includes Stock Market Short-Termism’s Impact by Mark Roe (discussed on the Forum here); The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); and The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here).

The Corporate Practice Commentator announced earlier this month the list of the Ten Best Corporate and Securities Articles selected by an annual poll of corporate and securities law academics. The list includes an article from Harvard Law School Professor Mark Roe, Stock Market Short-Termism’s Impact, 167 U. Pa. L. Rev. 71-121 (2018) (available here and discussed on the Forum here).

The top ten articles were selected from a field of almost 400 articles. Professor Robert Thompson of Georgetown Law School conducted the poll. Additional information about the best corporate and securities law articles of 2018 and the selection process is available here.

The abstract of Professor Roe’s article describes the analysis as follows:

Stock-market-driven short-termism is crippling the American economy, according to legal, judicial, and media analyses. Firms forgo the R&D they need, cut capital spending, and buy back their own stock so feverishly that they starve themselves of cash. The stock market is the primary cause: directors and executives cannot manage for the long-term when their shareholders furiously trade their company’s stock, they cannot make long-term investments when stockholders demand to see profits on this quarter’s financial statements, they cannot even strategize about the long-term when shareholder activists demand immediate results, and they cannot keep the cash to invest in their future when stock market pressure drains away that cash in stock buybacks.

This doomsday version of the stock-market-driven short-termism argument entails economy-wide predictions that have not been well-examined for their severity and accuracy. If the scenario is correct and strong, we should first see sharp increases in stock trading in recent decades and more frequent activist interventions, and these increases should be accompanied by (1) sharply declining investment spending in the United States, where large firms depend on stock markets and where activists are important, as compared to advanced economies that do not depend as much on stock markets, (2) buybacks bleeding cash out from the corporate sector, (3) economy-wide R&D spending declining from what it should be, and (4) a stock market unwilling to support innovative, long-term, technological firms. These are the central channels from stock market-driven short-termism to overall economic degradation. They justify corporate law policies that seek to prevent these outcomes.

But these predicted economy-wide outcomes are either undemonstrated, implausible, or untrue. Corporate R&D is not declining, corporate cash is not bleeding out, and the world’s developed nations with neither American-style quarterly oriented stock markets nor aggressive activist investors are investing no more in capital equipment than the United States. The five largest American firms by stock market capitalization are tech-oriented, R&D intensive, longer-term operations. The economy-wide picture is more one of capital markets moving capital from larger, older firms to younger ones; of a post-industrial economy doing more R&D than ever; and of an economy whose investment intensity depends on overall economic activity, not stock market trading nor hedge fund activism. True, the economy-wide data could hide stock-market hits that hold back R&D from increasing more and that weaken American capital spending more than is fitting for a post-industrial economy. But if so, these have not been shown and several seem implausible. Hence, the calamitous form of the stock-market-driven short-termist argument needs to be reconsidered, recalibrated, and, quite plausibly, rejected.

Then, last, comes the broadest question: why has a view that lacks strong economy-wide evidentiary support become the rare corporate governance issues that attracts attention from the media, political players, policymakers, and the public—and that is widely accepted as true? I suggest why in this paper’s final part.

The complete article is available here.

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