Increased Unengaged Monitoring and Shifts in Investment Time Horizons of U.S. High-tech Firms

Abstract

The strategic governance literature argues that stringent monitoring of firms can reduce information asymmetry, thereby increasing executives’ long-term orientation. However, monitoring that involves limited interaction between monitors and executives, which we refer to as unengaged monitoring, reduces information asymmetry about short-term activities without reducing information asymmetry about uncertain long- term activities. Unengaged monitors’ emphasis on current activities creates earnings pressure that increases employment risk and shifts managers’ preferences away from uncertain long-term investments. This paper assesses how the 2002 Sarbanes-Oxley Act affected U.S. firms operating in high- technology sectors, showing that greater unengaged monitoring often reduced R&D and increased short-term investments. The shift of time horizons was strongest for firms with higher managerial discretion and/or lower technological competition, where monitors face greatest ambiguity about long-term investments.