Economic policy uncertainty and managerial short-termism

Abstract

Economic policy uncertainty (EPU) has been on the rise worldwide in recent decades and affects macroeconomic and firm performance severely. This exacerbates short-termism among managers, who are more likely to pursue immediate benefits during times of uncertainty. It is therefore important for policymakers, managers, and investors to understand the effects of EPU. This study examines the relationship between EPU and managerial short-termism using data from 2002 to 2020. Using managers' abnormal discretionary spending cuts as a proxy for managerial short-termism, we find that these spending cuts increase during periods of high EPU and are more pronounced in EPU-sensitive firms. In addition, we show that managers are more likely to meet or slightly beat their earnings targets when EPU is high, suggesting that EPU causes managers' myopic behavior. This study shows how managers react to EPU. Because managerial short-termism undermines companies' long-term value, investors and regulators must pay close attention to the recent increase in EPU globally.