The perceived dangers of “short-termism” in public capital markets have come to occupy center stage as a chief concern for corporate America. During the last decade, an emerging conventional wisdom has taken root among lawyers, business commentators, judges, policymakers and (at least some) investors, asserting that managers of public companies are too often pressured to pursue short-term gains at the expense of managing for long-term value. Although concerns about short-termism are hardly new (recurring for over a quarter century), the recent rise of hedge fund activism and corporate governance intermediation has added a sense of urgency—if not emergency—to the critical chorus warning of the perils of myopia.
Much of the ensuing debate about short-termism has tended to revolve around competing claims concerning the phenomenon in isolation. Many skeptics, for example, have rejoined that arbitrage activity in efficient capital markets should create a natural corrective mechanism that eviscerates (or substantially dampens) most short-term biases. Others have questioned the magnitude of the phenomenon, or argued that claims about short-termism are little more than disingenuous apologies for managerial agency costs and empire building. Nevertheless, manifest concerns about the perils of short-termism—and the existential threat it poses for long-term value creation—persist in both public discourse and some influential corners of academic research. The kerfuffle over short-termism has attracted passionate adherents on both sides, with the resulting battlefield resembling something close to a standoff.
In a recent working paper, we argue that the stalemate over short-termism might be due (at least in part) to the failure of advocates from both sides to confront seriously two curious paradoxes about their own debate. First, even if episodic short-term bias might conceivably emerge in appropriate capital market settings, its persistence over time is difficult to explain. Why would sophisticated market participants, for example, deliberately and repeatedly leave money on the table during both economic upturns and downturns, eschewing superior long-term investments in order to extract a quick payout? The conventional response that hedge fund managers are compensated to think in like short-termists rings particularly hollow: nothing requires the persistence of standard “two and twenty” compensation packages; and yet, hedge funds have generally not backed away from it (doing the opposite if anything). The second puzzling aspect of the current debate concerns the concept of long-term value creation itself, and its seemingly “deified” status as the consensus gold standard for corporate governance. In other words, while the clash over the existence and/or magnitude of short-term bias has raged on, most seem willing to stipulate that long-term value maximization remains a paragon objective (quibbling only about how best to realize it).
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