Explaining corporate short-termism: self-reinforcing processes and biases among investors, the media and corporate managers

Abstract

Based on the related literature in economics, organizational sociology and the sociology of finance, this article constructs a novel conceptual explanation for corporate short-termism, that is, the tendency of corporate managers to sacrifice long-term investments to improve short-term earnings (STEs). We theorize about how such corporate short-termism emerges, at least partly, from systemic, self-reinforcing processes across various communities of actors including investors, the media and managers themselves. In doing so, we refute the common notion that corporate short-termism is caused by an inherent preference of investors or other actors to focus on STEs. Consequently, the systemic perspective offered by this article questions some conventional assumptions about the roots of corporate short-termism and emphasizes the influence of coordination mechanisms and behavioural biases in giving rise to self-reinforcing loops.

Vocabularies of Motive and Temporal Perspectives: Examples of Pension Fund Engagement and Disengagement

“…The systematic and self‐reinforcing processes are something that Aspara et al . () and Whittle and Mueller () have been investigating recently in relation to investors, the media and the banks.…”

“…Aspara et al . () theorized about self‐reinforcing processes and biases within organizations when they investigated the causes for corporate short‐termism. Most recently, Whittle and Mueller () have used similar ideas when they examined the testimonies of leaders of British banks during a UK public inquiry into the financial crisis.…”

Financialization and Portuguese real investment: A supportive or disruptive relationship?

“…Firstly, Crotty (2005) suggested that the increase in nonfinancial corporations' financial investments (which also take the form of buying or expanding financial subsidiaries) was caused by pressure from shareholders to raise current profitability and thus a focus on shorter planning horizons. The short-termism of non-financial corporations reflects the tendency to sacrifice long-term investments in order to improve short-term profits (Hein 2012;Aspara et al, 2014;and Hein and Dodig, 2015). Samuel (2000) defines this focus by managers on short-term profits at the expense of long-term expansion as "managerial myopia".…”

Financialisation and real investment in the European Union using a country-level analysis: beneficial or prejudicial effects?

“…This short-termism mirrors a tendency among investors to sacrifice long-term investment projects in order to increase short-term profits (Aspara et al, 2014). According to Samuel (2000), this focus on short-term profits instead of long-term expansion reflects a certain "managerial myopia".…”