Abstract
For short-termism to be a material problem necessitating regulatory correction there needs to be at least some demonstrable harm. This chapter discusses the difficulties around measuring the impacts of short-termism, and analyzes the research conducted demonstrating the harms of short-termism. This research identifies four key categories of harm: (1) reduced firm productivity, (2) reduced trust in the stock market, (3) societal costs, and (4) wealth transfer from future to current asset owners and concludes that the probable areas of harm are (2) reduced trust in the stock market and (4) the wealth transfer.
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Notes
- 1.
Fried (2015, 1569).
- 2.
Jackson and Petraki (2011, 5).
- 3.
Ibid.
- 4.
Ibid.
- 5.
Mauboussin and Callahan (2015, 72).
- 6.
Ibid., 71, referencing Anderson (1972).
- 7.
Ibid., 71.
- 8.
Rieg (2015, 212).
- 9.
Ibid.
- 10.
Admittedly, any of the four categories could validly be defined as ‘societal costs.’ However, the term ‘societal costs’ is used here to mean the implications of certain negative behaviours of company managers allegedly connected to SMST and the impacts of SMST on sustainability generally. These negative behaviours of corporate managers include excessive risk-taking, corporate greed, fraud and disregard for, or harm to, the interests of other stakeholders of the listed company, including environmental interests.
- 11.
- 12.
Graham et al. (2005, 4).
- 13.
Hughes (2014, 11).
- 14.
Aspen Institute (2010, 1).
- 15.
Ibid., 2, referring to a survey conducted by Graham et al. (2005), which was updated and enhanced in Graham et al. (2006), of 401 senior financial executives and in-depth interviews with an additional 22 executives which concluded that the destruction of shareholder value through legal means is a persuasive, if not routine way of doing business.
- 16.
Ibid.
- 17.
Kay (2012) (Kay Review).
- 18.
Hughes (2014).
- 19.
Ibid., 8.
- 20.
Ibid., 8–9.
- 21.
Ibid., 9.
- 22.
See Tovey (2015) which notes that R&D in 2014 was up 5% from the prior year, but remained constant at 1.1% of GDP, considerably lower than other nations.
- 23.
CEO Letter to Shareholders, J. P. Morgan Chase (4 April 2017), 32. Online: https://www.jpmorganchase.com/corporate/investor-relations/document/ar2016-ceolettershareholders.pdf.
- 24.
Ibid.
- 25.
Surowiecki (2015).
- 26.
Zandi (2015).
- 27.
Jarsulic et al. (2015).
- 28.
Kay (2012, 15).
- 29.
Jackson and Petraki (2011, 19).
- 30.
Ibid.
- 31.
Ibid.
- 32.
Ibid.
- 33.
Kay (2012, 5).
- 34.
Ibid.
- 35.
Ibid., 26.
- 36.
Ibid.
- 37.
Kay (2012, 24).
- 38.
“Number of IPOs in the United States from 1999 to 2017.” Statista. Online: https://www.statista.com/statistics/270290/number-of-ipos-in-the-us-since-1999/.
- 39.
See Reid Smith and Merger Market Report, “Taking Stock: Going Public in Uncertain Times” (2016), where a survey of market participants indicated that short-termism of investors was a major reservation in going public.
- 40.
McNevin (2016).
- 41.
Wasik (2017) in which it is observed that although UK IPOs are down—likely largely due to Brexit uncertainty—‘[t]here have been more fresh stock market listings globally than any other similar period since 2000, while the value of global IPOs for the same period has more than doubled compared to last year’.
- 42.
- 43.
Number of Listed Companies for the World (1975–2015) FRED Economic Data Economic Research, Federal Reserve Bank of St. Louis. Online: https://fred.stlouisfed.org/series/DDOM011WA644NWDB.
- 44.
Listed domestic companies, total (OECD countries), The World Bank. Online: https://data.worldbank.org/indicator/CM.MKT.LDOM.NO?locations=OE.
- 45.
Brorsen (2017).
- 46.
Market capitalization of listed domestic companies (% of GDP) (OECD countries), The World Bank. Online: https://data.worldbank.org/indicator/CM.MKT.LCAP.GD.ZS.
- 47.
Market capitalization of listed domestic companies (current US$) (United States), The World Bank. Online: https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?locations=US.
- 48.
Brorsen (2017).
- 49.
Ibid.
- 50.
Renneboog and Vansteenkiste (2017, 3).
- 51.
Global Private Equity (2017, 2).
- 52.
Bower (2017).
- 53.
Dell (2014).
- 54.
Qualtrough (2014).
- 55.
Ibid.
- 56.
See Chapter 5, Sect. A.1.
- 57.
See the discussion by Colvin (2017).
- 58.
Espinoza (2017).
- 59.
Wastell (2017).
- 60.
Roe (2013, 987–988).
- 61.
Kay (2012, 25).
- 62.
Ibid., 22, where Kay observes that “[e]quity markets have not been an important source of capital for new investment in British business for many years…[l]arge UK companies are self-financing – the cash flow they obtain from operations through profits and depreciation is more than sufficient for their investment needs.”
- 63.
See Chapter 2, Sect. A.1.
- 64.
Arestis et al. (2001, 18).
- 65.
“Valuing Private Companies.” Investopedia (16 November 2016). Online: http://www.investopedia.com/articles/fundamental-analysis/11/valuing-private-companies.asp, and see the discussion in Chapter 2, Sect A.1.
- 66.
Wursthorn and Zuckerman (2018).
- 67.
Ibid.
- 68.
Ibid.
- 69.
LaCroix (2018).
- 70.
Rose and Solomon (2016).
- 71.
Ibid., 87.
- 72.
Ibid.
- 73.
Dallas (2012, 313).
- 74.
Jarsulic et al. (2015).
- 75.
Ibid.
- 76.
See Chapter 6, Sect. B.2.b.
- 77.
Ibid.
- 78.
Ibid.
- 79.
Greenfield (2011, 628).
- 80.
- 81.
Salter (2012), where the author explains using the example of Citigroup and its settlement with the US Securities and Exchange Commission (SEC) on fraud charges, how the firms focus on short-term profit invited corruption.
- 82.
See the Aspen Institute (2010, 4), which cites a survey of corporate directors of Fortune 200 boards, 31 of 34 of which state that they would “cut down a mature forest or release a dangerous, unregulated toxin into the environment in order to increase profits.”
- 83.
Cleary (2015, 23).
- 84.
Financial Short-Termism (2012).
- 85.
Cleary (2015, 11).
- 86.
Ibid.
- 87.
- 88.
Ibid.
- 89.
Ibid.
- 90.
Fried (2015, 1568).
- 91.
Davies et al. (2014, 16).
- 92.
See Chapter 6, Sect. B.2.b.
- 93.
Davies et al. (2014, 16).
- 94.
See Chapter 5, Sect. A.1.
- 95.
- 96.
See Chapter 5, Sect. A.1.
- 97.
See Chapter 5, Sect. A.
- 98.
Definition of ‘buyback’, Investopedia. Online: https://www.investopedia.com/terms/b/buyback.asp.
- 99.
See Lazonick (2014) summarizing the research that Professor Lazonick has done in this area. This research shows that 54% of the earnings of the 449 companies in the S&P 500 index which were publicly listed from 2003 to 2012 were used to buy back stock, and dividends absorbed an additional 37% of earnings (Lazonick 2014, 48). This rate has also doubled from the previous 10-year period—See Ro (2014).
- 100.
Samson et al. (2017).
- 101.
Cowen (2018).
- 102.
- 103.
Lazonick (2014, 51).
- 104.
Cowen (2018).
- 105.
Gutierrez and Philippon (2016).
- 106.
Lazonick (2014, 52).
- 107.
- 108.
Ibid.
- 109.
Almeida et al. (2016).
- 110.
Ibid., 48.
- 111.
Ibid., 53, which also references Gary P. Pisano and Willy C. Shih of Harvard Business School, in their 2009 Harvard Business Review article “Restoring American Competitiveness” and their book Producing Prosperity.
- 112.
Yallapragada (2014, 193).
- 113.
Lazonick (2014, 51).
- 114.
- 115.
See Chapter 5, Sect A.4.
- 116.
- 117.
Barton et al. (2017, 3) (McKinsey Report 2017).
- 118.
Ibid.
- 119.
Ibid., 2.
- 120.
See Chapter 5, Sect. B.2.b.
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Willey, K.M. (2019). What Are the Harms of Short-Termism?. In: Stock Market Short-Termism. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-22903-0_7
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