Advertisement

Short-Termism Transmission Mechanisms

  • Kim M. Willey
Chapter

Abstract

For the short-termism in Chapter 5 to be an issue, it must somehow result in short-termism actions of listed companies. This chapter explores the argument the short-term interests of asset owners and intermediaries are transmitted into listed companies mainly through shareholder activism and executive compensation and the resulting actual or perceived impact of such practices on share prices of listed companies. Consequently, the upstream short-term interests impact the actions of listed companies by causing company managers to forgo longer-term value maximization in favour shorter-term returns.

References

  1. Allaire, Yvon and Dauphin, Francois. 2015. “Hedge Fund Activism: Preliminary Results and Some New Empirical Evidence.” 1 April. Institute for Governance of Public and Private Corporations.Google Scholar
  2. Aspen Institute. 2009. “Overcoming Short-Termism: A Call for a More Responsible Approach to Investment and Business Management.” 9 September.Google Scholar
  3. Bachelder, Joseph E. 2014. “What Has Happened to Stock Options?” 2 October. Harvard Law School Forum on Corporate Governance and Financial Regulation. https://corpgov.law.harvard.edu/2014/10/02/what-has-happened-to-stock-options/.
  4. Barton, Dominic. 2011. “Capitalism for the Long Term.” March. Harvard Business Review. 84–90.Google Scholar
  5. Barty, James and Jones, Ben. 2012. Executive Compensation: Rewards for Success Not Failure. July. Policy Exchange.Google Scholar
  6. Bebchuk, Lucien, Brav, Alan, and Wei, Jiang. 2015. “The Long-Term Effects of Hedge Fund Activism.” 115:5 Columbia Law Review. 1085–1156.Google Scholar
  7. Becht, Marco, Franks, Julian, Grant, Jeremy, and Wagner, Hammes F. 2015. “The Returns to Hedge Fund Activism: An International Study.” 15 March. Center for Economic Policy Research Discussion Paper No. 10507. http://ssrn.com/abstract=2376271.
  8. Bettis, J. Carr, Bizjak, John M., Coles, Jeffrey L., and Kalpathy, Swaminathan L. 2018. “Performance-Vesting Provisions in Executive Compensation.” 25 April. http://dx.doi.org/10.2139/ssrn.2289566.
  9. “BlackRock’s Fink Urges CEOs to Focus Capital on Long-Term Growth.” 26 March 2014. Investment News. https://www.investmentnews.com/article/20140326/free/140329929/blackrocks-fink-urges-ceos-to-focus-capital-on-long-term-growth.
  10. Bos, Sebastian, Pendleton, Andrew, and Toms, Steve. 2013. “Earnings Management in the UK: Managerial Share Ownership, Minority Shareholder Protection and Discretionary Accruals.” 14 January. https://ssrn.com/abstract=1747919.
  11. Brav, Alon, Harvey, Campbell R., Graham, John R., and Michaely, Roni. 2005. “Payout Policy in the 21st Century.” November. Tuck Contemporary Corporate Finance Issues III Conference Paper. https://ssrn.com/abstract=571046.
  12. Brochet, Francois, Serafeim, George, and Loumioti, Maria. 2012. “Short-Termism: Don’t Blame Investors.” June. Harvard Business Review. 28.Google Scholar
  13. Brown, J. Robert. 2014. “Delaware Law and the Right of Shareholders to Call Special Meetings.” 13 August. TheRacetotheBottom.org. http://www.theracetothebottom.org/home/delaware-law-and-the-right-of-shareholders-to-call-special-m.html.
  14. Chen, Xia, Harford, Jarrad, and Li, Kai. 2007. “Monitoring: Which Institutions Matter.” November. 86:2 Journal of Financial Economics. 279–305.CrossRefGoogle Scholar
  15. Coffee, John C., Jr. and Palia, Darius. 2015. “The Wolf at the Door: The Impact of Hedge Fund Activism: Evidence and Implications.” 4 September. Working Paper No. 521. http://wlrk.com/docs/The_Wolf_at_the_Door_The_Impact_of_Hedge_Fund_Activism_on_Corporate_Governance.pdf.
  16. Cremers, K. J. Martijn, Pareek, Ankur, and Sautner, Zacharias. 2019. “Short-Term Investors, Long-Term Investments, and Firm Value: Evidence from Russell 2000 Index Inclusions.” 26 March. https://ssrn.com/abstract=2720248.
  17. Dallas, Lynne L. 2012. “Short-Termism, the Financial Crisis, and Corporate Governance.” 2011–2012. 37:2 The Journal of Corporation Law. 265–364.Google Scholar
  18. Dallas, Lynne L. and Barry, Jordan. 2016. “Long-Term Shareholders and Time-Phased Voting.” 40:2 Delaware Journal of Corporate Law. 541–646.Google Scholar
  19. Davies, Richard, Haldane, Andrew G., Nielsen, Mette, and Pezzini, Silvia. 2014. “Measuring the Costs of Short-Termism.” 12 Journal of Financial Stability. 16–25.CrossRefGoogle Scholar
  20. Dawson, Nick. 2017. “LTIP-ing Point: Is This the End of Long-Term Incentive Plans?” 12 May. Harvard Law School Forum on Corporate Governance and Financial Regulation. https://corpgov.law.harvard.edu/2017/05/12/ltip-ing-point-is-this-the-end-of-long-term-incentive-plans/.
  21. Denning, Steven. 2013. “The Origin of the ‘World’s Dumbest Idea’: Milton Friedman.” 26 June. Forbes. https://www.forbes.com/sites/stevedenning/2013/06/26/the-origin-of-the-worlds-dumbest-idea-milton-friedman/#6d58c973870e.
  22. Denning, Steve. 2014. “Why Can’t We End Short-Termism.” 22 July. Forbes. https://www.forbes.com/sites/stevedenning/2014/07/22/why-cant-we-solve-the-problem-of-short-termism/#45c7ba7b3376.
  23. Denning. Steve. 2017. “Resisting the Lure of Short-Termism: Kill ‘The World’s Dumbest Idea’.” 8 January. Forbes. https://www.forbes.com/sites/stevedenning/2017/01/08/resisting-the-lure-of-short-termism-how-to-achieve-long-term-growth/#1d2287451ca0.
  24. Dent, George. 2010. “Essential Unity of Shareholders and the Myth of Investor Short-Termism.” 35:1 Delaware Journal of Corporate Law. 97–150.Google Scholar
  25. Dichev, Ilia, Graham, John, Harvey, Campbell R, and Shiva, Rajgopal. 2016. “The Misrepresentation of Earnings.” 2016. 72:1 Financial Analysts Journal. 22–35.Google Scholar
  26. Easterbrook, Frank H. and Fischel, Daniel R. 1981. “The Proper Role of a Target’s Management in Responding to a Tender Offer.” April. 94:6 Harvard Law Review. 1161–1204.CrossRefGoogle Scholar
  27. European Union Green Paper. 2011. “The EU Corporate Governance Framework.” COM (2011)164. 5 April.Google Scholar
  28. Ferris, Robert. 2017. “GM Shareholders Overwhelmingly Defeat Greenlight’ Proposal.” 6 June 2017. CNBC. http://www.cnbc.com/2017/06/06/general-motors-defeats-greenlight-capitals-board-nominations-and-stock-plan-proposal.html.
  29. Fisman, Raymond J., Khurana, Rakesh, and Rhodes-Kropf, Matthew. 2005. “Governance and CEO Turnover: Do Something or Do the Right Thing?” January. EFA 2005 Moscow Meetings Paper. https://ssrn.com/abstract=656085 or http://dx.doi.org/10.2139/ssrn.656085.
  30. Flaherty, Michael. 2016. “Starboard Launches Proxy Fight to Remove Entire Yahoo Board.” 29 March. Reuters. http://www.reuters.com/article/us-yahoo-starboard-proxy-idUSKCN0WQ0D7.
  31. Foley, Stephen. 2017. “Einhorn Drives Proxy Battle for 4 Seats on GM Board.” 28 March. Financial Times. https://www.ft.com/content/c74171d5-698d-37a7-a6b4-2019ae30054a?mhq5j=e1.
  32. Frankl, J. and Balet, S. 2017. “The Rise of Settled Proxy Fights.” 22 March. Harvard Law School Forum on Corporate Governance and Financial Regulation. https://corpgov.law.harvard.edu/2017/03/22/the-rise-of-settled-proxy-fights/.
  33. Fried, Jesse M. 2015. “The Uneasy Case for Favoring Long-Term Shareholders.” 124 The Yale Law Journal. 1554–1628.Google Scholar
  34. Friedman, Milton. 1970. “The Social Responsibility of Business Is to Increase Its Profits.” 13 September. New York Times. https://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html.
  35. Garratt, T. and Hamilton, K. 2016. “The Loneliness of The Long-Term Investor: A Comment on Patience in Practice.” 14:4 Socio-Economic Review. 789–806.CrossRefGoogle Scholar
  36. Gaspar, Jose Miguel, Massa, Massimo, and Matos, Pedro. 2005. “Shareholder Investment Horizons and the Market for Corporate Control.” April. 76:1 Journal of Financial Economics. 135–165. CrossRefGoogle Scholar
  37. Gilson, Ronald J. and Gordon, Jeffrey N. 2013. “The Agency Costs of Agency Capitalism: Activist Investors and the Revaluation of Governance Rights.” January. 113 Columbia Law Review. 863–928.Google Scholar
  38. “Global Activism on the Rise.” 4 October 2016. FTI Consulting. http://fticommunications.com/2016/10/global-activism-rise/.
  39. Graham, John R., Cam, Harvey, and Shiva, Rajgopal. 2005. “The Economic Implications of Corporate Financial Reporting.” December. 40 Journal of Accounting and Economics. 3–73.Google Scholar
  40. Graham, John R., Cam, Harvey, and Shiva, Rajgopal. 2006. “Value Destruction and Financial Reporting Decisions.” 62 Financial Analysts Journal. 27–39.CrossRefGoogle Scholar
  41. Guerrara, Francesco. 2009. “Welch Condemns Share Price Focus.” 12 March. Financial Times.Google Scholar
  42. Hay Group Inc., Summary Report. 2014. “Top Executive Compensation in Europe 2014.”Google Scholar
  43. Hsieh, Peggy, Koller, Timothy, and Rajan, S. R. 2016. “The Misguided Practice of Earnings Guidance.” March. McKinsey & Company, Strategy and Corporate Finance. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-misguided-practice-of-earnings-guidance.
  44. Jensen, Michael C. 2010. “Value Maximization, Stakeholder Theory, and the Corporate Objective Function.” 22:1 Journal of Applied Corporate Finance. 32–42.CrossRefGoogle Scholar
  45. Jenter, Dirk and Lewellen, Katharina. 2017. “Performance-Induced CEO Turnover.” 27 July. http://dx.doi.org/10.2139/ssrn.1570635.
  46. Kay, John. 2012. ‘The Kay Review of UK Equity Markets and Long-Term Decision Making.” Final Report. July.Google Scholar
  47. Koller, Timothy. 1994. “What Is Value-Based Management?” August. McKinsey Quarterly. http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/what-is-value-based-management.
  48. Kothuis, Hans and Chua, Jiawen. 2014. “Executive Compensation in Asia—Best Practices in a Dynamic Environment’ Mercer LLC.” https://www.mercer.com/content/dam/mercer/attachments/asia-pacific/asia/Mercer_Executive_Compensation_in_Asia_Best_Practices_10525A-HC.pdf.
  49. Larkin, Yelena, Leary, Mark T., and Michealy, Roni. 2017. “Do Investors Value Dividend-Smoothing Differently.” December. 63:12 Management Science. 3999–4446.Google Scholar
  50. Lee, Wendy. 2016. “Yahoo Settles with Starboard, Avoiding Messy Proxy Fight.” 27 April. San Francisco Gate. http://www.sfgate.com/business/article/Yahoo-settles-with-Starboard-7378599.php.
  51. Lipton, Martin. 1979. “Takeover Bids in the Target Boardroom.” November. 35 The Business Lawyer. 101–134.Google Scholar
  52. Lipton, Martin. 2015. “The Threat to the Economy and Society from Activism and Short-Termism Updated.” 27 January. Harvard Law School Forum on Corporate Governance and Financial Regulation. https://corpgov.law.harvard.edu/2015/01/27/the-threat-to-the-economy-and-society-from-activism-and-short-termism-updated/.
  53. Martin, Roger. 2015. “Yes, Short-Termism Really Is a Problem.” 9 October. Harvard Business Review. 2–7.Google Scholar
  54. Maton, Brendan. 2016. “Asset Management Fees: What Is the Going Rate?” March. IPE. https://www.ipe.com/investment/asset-management-fees-whats-the-going-rate/10012128.fullarticle.
  55. Matsumoto, Dawn A. 2002. “Management’s Incentives to Avoid Negative Earnings Surprises.” July. 77:3 The Accounting Review. 483–514.CrossRefGoogle Scholar
  56. Mergenthaler, R. D., Rajgopal, S., and Srinivasan, S. 2011. “CEO and CFO Career Penalities to Missing Quarterly Analysts Forecasts.” Working paper, University of Iowa.Google Scholar
  57. Millstein, Ira. 2005. “When Earnings Management Becomes Cooking the Books.” 26 May. Financial Times.Google Scholar
  58. Moore, Marc T. and Petrin, Martin. 2017. Corporate Governance: Law, Regulation and Theory. Palgrave Corporate and Financial Law: London, UK.CrossRefGoogle Scholar
  59. Moore, Marc T. and Walker-Arnott, Edward. 2014. “A Fresh Look at Stock Market Short-Termism.” 41:3 Journal of Law and Society. 416–445.CrossRefGoogle Scholar
  60. Nathan, Charles. 2015. “Observations on Short-Termism and Long-Termism.” 12 October. Harvard Law School Forum on Corporate Governance and Financial Regulation. https://corpgov.law.harvard.edu/2015/10/12/observations-on-short-termism-and-long-termism/.
  61. Phillips, Robert A., Freeman, R. Edward, and Wicks, Andrew. 2003. “What Stakeholder Theory Is Not.” 13:4 Business Ethics Quarterly. 479–502.Google Scholar
  62. Pozen, Robert C. 2015. “Institutional Investors and Corporate Short-Termism.” 24 August. Harvard Law School Forum on Corporate Governance and Financial Regulation. https://corpgov.law.harvard.edu/2015/08/24/institutional-investors-and-corporate-short-termism/.
  63. Rappaport, Alfred. 1986. Creating Shareholder Value: The New Standard for Business Performance. Free Press: New York.Google Scholar
  64. Rappaport, Alfred. 1998. Creating Shareholder Value: A Guide for Managers and Investors. Free Press: New York.Google Scholar
  65. Rappaport, Alfred. 2011. Saving Capitalism from Short-Termism: How to Build Long-Term Value and Take Back our Financial Future. McGraw-Hill: New York.Google Scholar
  66. Reland, Jacques. 2009. “The Dangers of the Cult of Shareholder Value in Reforming the City: Responses to the Global Financial Crisis.” London Forum Press. http://www.academia.edu/923008/The_Dangers_of_the_Cult_of_Shareholder_Value.
  67. Rieg, Robert. 2015. “Dynamics of Value-Based Management: Does Shareholder Value Cause Short-Termism?” August. 26:2/3 Journal of Management Control. 193–224.CrossRefGoogle Scholar
  68. Roach, Garnet. 2013. “Less Than 10 Percent of FTSE 100 Forms Provide Quantitative EPS Guidance.” 21 February. IR Magazine. https://www.irmagazine.com/articles/earnings-calls-financial-reporting/19328/ftse-100-shuns-us-style-earnings-guidance/.
  69. Roe, Mark J. 2013. “Corporate Short-Termism—In the Boardroom and in the Courtroom.” August. 68 Business Lawyer. 977–1006.Google Scholar
  70. Schnitzer, Maria. 1997. “Short-Termism and the Market for Corporate Control.” 36–58. In Picot, A. and Schlicht, E. (eds.). Firms, Markets, and Contracts: Contributions to Economics. Physica-Verlag: Heidelberg, Germany.Google Scholar
  71. Shapiro, Susan P. 2005. “Agency Theory.” 31 Annual Review of Sociology. 275–284.Google Scholar
  72. Sorkin, Andrew Ross. 2015. “Activists May Be Less Myopic That Their Reputation Suggests.” 4 November. New York Times.Google Scholar
  73. Squire, Ken. 2014. “Are Activists Short-Term Investors: No More Than Mutual Funds.” 28 May. FA Magazine. http://www.fa-mag.com/news/are-activists-short-term-investors—no-more-so-than-mutual-funds-18123.htmland.
  74. Strine, Leo E., Jr. 2015. “Securing Our Nation’s Economic Future: A Sensible, Nonpartisan Agenda to Increase Long-Term Investment and Job Creation in The United States.” University of Pennsylvania Institute for Law & Economics Research Paper No. 15-41.Google Scholar
  75. Tonello, Matteo. 2012. “The Influence of Proxy Advisory Firm Voting Recommendations.” 8 April. Harvard Law School Forum on Corporate Governance and Financial Regulation. https://corpgov.law.harvard.edu/2012/04/08/the-influence-of-proxy-advisory-firm-voting-recommendations/.
  76. Tonello, Matteo. 2015. “CEO and Executive Compensation Practices: 2015 Edition.” 15 September. Harvard Law School Forum on Corporate Governance and Financial Regulation. https://corpgov.law.harvard.edu/2015/09/15/ceo-and-executive-compensation-practices-2015-edition/.
  77. Trustee Leadership Forum for Retirement Security. 2016. “A Note on Short-Termism.” The Initiative for Responsible Investment. http://iri.hks.harvard.edu/files/iri/files/tlf-note-on-long-term-investing.pdf.
  78. Vlastelica, Ryan. 2017. “S&P 500 Dividend Payouts Hit a Record in the Third Quarter.” 3 October. MarketWatch. https://www.marketwatch.com/story/sp-500-dividend-payouts-hit-a-record-in-the-third-quarter-2017–10-03.
  79. Woolley, Paul. 2010. “Chapter 3: Why Are Financial Markets so Inefficient and Exploitative—And a Suggested Remedy.” In The Future of Finance: The LSE Report.Google Scholar

Copyright information

© The Author(s) 2019

Authors and Affiliations

  • Kim M. Willey
    • 1
  1. 1.Faculty of LawUniversity of VictoriaVictoriaCanada

Personalised recommendations