Short-term Thinking in U.S. Markets: A Growing Trend With Lasting Implications

Short-termism, or “quarterly-capitalism” as it is sometimes called, refers to the pressures public companies often face to return big profits as quickly as possible. While this way of thinking provides an instant win for shareholders, it can lead to systemic problems down the road. Companies put less attention into employee training, research and development (R&D), and the long-term cost of strategies such as outsourcing or environmentally unfriendly practices. As the race to return higher profits to shareholders intensifies, the well-being of the economy hangs in the balance.

In the first study to demonstrate economy-wide, firm-level evidence of increased short-termism and the implications for investment behaviors, “Evidence and Implications of Short-termism in U.S. Public Capital Markets: 1980-2013,” authors Rachelle Sampson, visiting associate professor of strategy at Georgetown’s McDonough School of Business and Yuan Shi, researcher at University of Maryland’s Smith School of Business show the shift to short-termism over the last 30 years.

The research establishes a strong trend of market discounting of firms over the last 30 years, with recent years showing ‘excess’ discount rates with an average of 2 percent, yet some as high as 30 percent. This high level of discounting puts pressure on firms to maximize returns in the short term, causing them to forego investment in other areas. As lead author Sampson said, “It’s fairly obvious that when cash is returned to investors at increasing rates, even when a company is earning less, that the money has to come from somewhere.”

The study uses a measure of market discounting from an asset pricing approach and data pulled from public firms listed on U.S. exchanges to estimate how short-termism has changed and what factors are closely correlated with firm differences in that measure. The researchers found investment in R&D and capital equipment, dedicated institutional ownership with low turnover, and long-term pay packages for top management are all negatively correlated with short-termism. On the flip side, little investment in R&D or capital equipment, ownership by high turnover transient investors, and large share repurchases (an investment that does not fuel future economic growth) all correlate with increased short-termism.

Increased shareholder activism is another growing trend, which the study connects to encouraging short-termism. There are instances in which activist shareholders engage with a company and shake things up for the better. However, more often than not, activist investors pressure firms to return profits immediately, usually at the expense of future investments, propelling a short-term view.

Sampson asserts this short-term focus is trouble for both companies and the economy. “When firms focus on the short term, they steer profits to shareholders immediately instead of spending money to improve productivity, the greatest driver of economic growth for both companies and our economy,” said Sampson. “They spend less on R&D for the next great products and services, less on capital spending to improve manufacturing efficiency, less on employee training, and less on environmental and community stewardship.”

There are obvious economic repercussions to these findings. As the first paper to document a long acting, market-wide trend, it represents an important jumping-off point for the United States to start assessing the implication of short-term firm strategy and the long-term economic implications.