Managerial Short-termism Research Articles

CEO outside Board Service and Managerial Short-Termism

CEO outside Board Service and Managerial Short-Termism

Managing for the future: managerial short-termism impact on corporate ESG performance in China

ESG performance measures the long-term sustainability of a company's development, whereas managerial short-termism cause companies to overly prioritize short-term profits at the expense of neglecting sustainable development. This study on Chinese listed companies from 2009 to 2021 examines the impact of managerial short-termism on corporate ESG performance. We found that managerial short-termism significantly inhibits corporate ESG performance. Furthermore, using text mining of internal and external sentiment data, our findings suggest that companies exhibiting negative sentiment in their annual reports and financial news reports are more susceptible to the detrimental impact of managerial short-termism on corporate ESG performance. In addition, the mechanism analyzes show that managerial short-termism affects corporate ESG performance by lowering R&D investment, reducing the internal ESG attention, declining investor sentiment and increasing financing constraints. The research results revealed that companies managing for the future can better reduce their risk in long-term development.

Economic policy uncertainty and managerial short-termism

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.

Corporate digital transformation, governance shifts and executive pay-performance sensitivity

We utilized text mining techniques to gauge a company's level of digital transformation and found that the higher the degree of digitalization, the more apparent the decoupling of executive compensation from performance, indicating lower sensitivity of executive pay to performance outcomes. Within the framework of agency theory, digital technology empowers shifts in corporate governance models, enabling process-based behavioral monitoring and constraining governance mechanisms, thereby reducing reliance on outcome-based incentive mechanisms. Heterogeneous analysis reveals that the substitutive effect of digitization on the pay-performance sensitivity is more pronounced in companies with lower executive ownership. These companies often rely more on compensation incentives in the absence of digital technology. Moreover, the effectiveness of digital technology in enhancing governance depends on the user's wealth of knowledge and technical proficiency. We additionally confirmed that digital transformation has a positive impact on mitigating agency problems, as it enhances information quality, improves internal control standards, reduces excessive perk, and diminishes managerial short-termism. In essence, digital transformation indeed elevates governance regime. Furthermore, we discovered that digitalization increases the association between compensation and executive effort. Our research findings provide a fresh perspective on corporate governance and executive incentive mechanisms in emerging markets.

The association between managerial short-termism and green innovation: the moderating role of firms’ digital transformation

Purpose The purpose of this study is to examine the impact of managerial short-termism on green innovation of firms and the moderating role of digital transformation of enterprises in the association between managerial short-termism and green innovation. Design/methodology/approach This study uses data from Chinese A-share listed companies from 2001 to 2021 and employ panel fixed model and moderating effect model to examine the impact of managerial short-termism on green innovation of firms and the moderating role of digital transformation of enterprises in the association between managerial short-termism and green innovation. Findings The findings of this study reveal that managerial short-termism exerts negative influence on green innovation. Digital transformation enables firms to reduce the adverse effect of managerial short-termism on green innovation because digital transformation enhances information processing ability and then improves internal corporate governance and analyst coverage. Moreover, the moderating role of digital transformation is more prominent for firms with lower internal corporate governance, for firms with less analyst coverage and for non-state-owned enterprises. Originality/value This paper intends to address the following two questions: what is the impact of managerial short-termism on green innovation and what is the role of digital transformation in the two variables’ association? By using data of Chinese A-share listed companies from 2001 to 2021 and developing two individual indexes to measure managerial short-termism and digital transformation, the authors empirically test these above two questions. The results of this study indicate that: First, drawn on time-oriented theory and upper echelon theory, managerial short-termism has an adverse effect on firms’ green innovation. Second, digital transformation enables firms to reduce the negative effect of managerial short-termism on green innovation. Furthermore, the moderating mechanism tests show that the corporate governance effects of digital transformation play a supervisory role that impels managers to reduce short-term investments and promote firms’ green R&D investments, which helps to reduce the negative effect of managerial short-termism on green innovation. Additionally, the heterogeneity checks show that the moderating role of digital transformation in the relation between managerial short-termism and green innovation is more prominent for firms with lower internal corporate governance, with less analyst coverage and for non-state-owned enterprises.

Does managerial short-termism always matter in a firm's corporate social responsibility performance? Evidence from China

Using data on Chinese A-share listed firms from 2008 to 2017, we explore how corporate social responsibility (CSR) performance is affected by managerial short-termism and what factors influence the association between the two. First, by employing text analysis in conjunction with machine learning, we construct a new managerial short-termism indicator. Using panel fixed models, we find that managerial short-termism has an adverse impact on CSR performance, and the results are consistent in a series of robustness checks. The heterogeneous test results show that the negative effect is significant only for firms with lower internal corporate governance, for firms in less competitive industries, for firms with less analyst attention, and for state-owned enterprises (SOEs). Additionally, a better institutional environment weakens the negative impact of managerial short-termism on CSR performance. The findings shed light on policy implications for emerging countries.

Does green finance promote green innovation? Evidence from China.

The green finance sector is key to accelerating the green transformation of economic structures and promoting green economic growth. However, understanding how to effectively combine green finance and green innovation is still in the exploratory stage. Using the implementation of the Green Credit Guidelines (hereinafter Guidelines) in 2012 as a quasi-natural experiment, we examine the causal relationship between green finance and green innovation. According to our findings, the green innovation performance of green credit-restricted industries improved significantly after the implementation of the Guidelines, although quality improvements of green innovation were not evident. This was a result of improved management efficiency and investment efficiency. Additionally, the Guidelines appear to have a more positive impact on green innovation for firms with lower levels of managerial short-termism or firms in regions with stronger environmental law enforcement. Green innovation can significantly enhance the environmental and social performance of a company.

Takeover deterrence with state ownership: Evidence from China

This study examines the role of Chinese state ownership in deterring takeovers. We document state ownership’s reduction in firms’ susceptibility to potential takeovers. Using staggered privatization of the state-owned shareholders of public firms, as shocks to the deterrent effect of the state, we find that state-owned shareholders can insulate their portfolio firms from potential takeovers. The deterrent effect of state ownership is concentrated in strategic industries and well-functioning assets, alleviating managerial short-termism.

Will Managerial Short-termism Promote Corporate Tax Avoidance?

Taking A-share listed companies from 2007 to 2020 as research samples, this paper empirically tested the impact of managerial short-termism on corporate tax avoidance behavior. The research findings: Managerial short-termism has a significant positive impact on corporate tax avoidance, and the promotion effect of managerial short-termism on corporate tax avoidance is still significant when multiple indicators of tax avoidance behavior are distinguished. In the further analysis of state-owned enterprises and non-state-owned enterprises, The promotion effect of managerial short-termism on corporate tax avoidance in state-owned enterprises is less significant than that in non-state-owned enterprises.The conclusion of this study has certain reference significance for enterprises to improve their own governance level.

Meet, beat, and pollute

We investigate two related questions about the trade-off between the short-term pressures on managers to meet earnings targets and the long-term environmental benefits of reduced pollution. Do firms release more toxins by cutting back on pollution abatement costs to boost earnings in years they meet earnings benchmarks? If so, is that relation weaker for firms with higher environmental ratings? Using Environmental Protection Agency (EPA) data on toxic emissions, we find that U.S. firms pollute more when they meet or just beat consensus earnings per share (EPS) forecasts, suggesting that meeting expectations is a more important goal than reducing pollution. We find this relation is stronger, not weaker, for firms with higher environmental ratings: they increase pollution even more when meeting earnings benchmarks than firms with lower ratings. This suggests that highly rated firms build regulatory and reputational slack over time and use it when needed to soften the negative impact of increased pollution. We contribute to the real earnings management and environmental economics literatures by documenting a negative externality of financial reporting incentives on the environment and society. We also contribute to the corporate sustainability literature by showing that an environmental, social, and governance (ESG) focus does not curb managerial short-termism.

Public Listing, Managerial Short-termism, and Brand Development

Public Listing, Managerial Short-termism, and Brand Development

Managerial Short-Termism and Corporate Tax Avoidance

Managerial Short-Termism and Corporate Tax Avoidance

Climate-Related Uncertainty and Managerial Short-Termism

Climate-Related Uncertainty and Managerial Short-Termism

Information disclosure ratings and managerial short-termism: An empirical investigation of the Chinese stock market

Information disclosure ratings and managerial short-termism: An empirical investigation of the Chinese stock market

Are non-family successors all the same? Inside-promoted vs. outside-sourced

This paper studies the differences in post-succession changes in managerial styles and operating performance among three types of successors, namely family successors, inside-promoted non-family successors and outside non-family successors. The data is drawn from Taiwan, where family firms dominate the domestic stock market and there exists a rich, lengthy data set available for analysis. We find that firms having undergone outside non-family successions increase operating performance. This result, however, comes with the cost of managerial short-termism, leading to a reduction in long-term investment. On the other hand, outside non-family successors also improve investor relationships while impairing employee and bank relationships. In contrast, inside-promoted non-family successors tend to increase long-term investment, which differentiates them from family successors who do not adjust investment policies after successions; elsewhere these two types of successors' managerial styles appear to be relatively similar.

Managerial Short-termsim, Board Gender Diversity, Analyst Coverage And Their Effects On CSP

While commentators have long decried managerial short-termism, no prior research has examined the deleterious effects of managerial short-termism on corporate social performance (CSP), nor how to ameliorate that negative effect. Moreover, due to the difficulty of unobtrusively measuring what is fundamentally a cognition in firms, empirical evidence at the organizational level of short-termism’s effect on firm outcomes is relatively sparse. Here, we measure managerial short-termism by content analyzing firms’ publicly filed annual reports (10-Ks). Using a combined dataset for 1,703 U.S. firms for the period 2000-2013, we show that managerial short-termism is negatively associated with CSP. However, we also show that this effect can be reduced through increased monitoring by important stakeholders who value CSP, specifically through increasing board gender diversity and analyst coverage.

Corporate Derivatives Usage, Information Environment, and Stock Price Crash Risk

This study investigates the effect of corporate derivatives usage on stock price crash risk. We test two competing hypotheses. Under the transparency hypothesis, derivatives usage reduces information opacity and lowers crash risk. Under the speculation hypothesis, derivatives usage exacerbates managerial short-termism and increases crash risk. We find evidence supporting the transparency hypothesis. This result is robust to sensitivity checks including a two-stage treatment model, difference-in-differences test, and subsample analysis. We further show that curbing bad news hoarding, curtailing overinvestment, and increasing breadth of ownership are potential channels through which derivatives usage mitigates crash risk. Additional tests on the effect of derivatives usage on likelihood of securities class-action litigation provide consistent results.

Co-opted boards and earnings management: Evidence of reduced short-termist behavior

This study contributes to the emerging literature on board co-option by examining how and to what extent co-opted directors influence managers’ attitudes about earnings management. We find robust evidence that co-option mitigates both real activities and accrual-based earnings management. Our findings support the view that higher co-option reduces managerial short-termism because it enhances managers’ job security as co-opted directors are known to be less likely to remove managers from office. Our results are robust to different measures of both co-option and earnings management, and they continue to hold after accounting for endogeneity and selection concerns. Finally, we provide additional evidence showing that a higher degree of co-option lowers the likelihood of the chief executive officer (CEO) being forcefully removed from the office for managing earnings in the previous year. JEL CLASSIFICATION G30; G34; G39

Long-Term Bias, Incentives, and Agency Costs


 
 
 The problem of managerial short-termism has long preoccupied policymakers, researchers, and practitioners. These groups have given much less attention, however, to the converse problem of managerial long-termism. Michal Barzuza and Eric Talley fill this gap in their pioneering article, Long-Term Bias. Relying on the behavioral finance and psychology literatures, the authors provide a novel and thought-provoking analysis of managerial long-term bias, which may be just as detrimental as the more widely condemned short-term bias.
 This invited Comment to Barzuza and Talley’s article advances three claims. First, it argues that proper incentives— created by executive compensation, heightened risk of early termination, market responses and shareholder pressures— are likely to turn most managers more realistic and thus to mitigate their long-term biases.
 Second, it explains how, in reality, it could be almost impossible to distinguish between long-term bias and traditional agency theories of empire building and pet projects. Ultimately, both long-termist and self-interested managers systematically harm shareholders; both choose to ignore shareholder interests and waste free cash flow on inferior business investments. This also explains why the cure to both long-term bias and agency costs is similar: reducing the relative insulation of the board from shareholders’ disciplinary power.
 
 
 
 Finally, this Comment expresses strong support for most of Barzuza and Talley’s normative conclusions, with one important exception: their acceptance of the use of dual-class stock. With a perpetual lock on control and a limited equity stake, corporate leaders will be immune to any “institutional brake” on all forms of long-termist overinvestment. If anything, the analysis of Barzuza and Talley provides an additional strong justification to oppose the use of perpetual dual-class stock.
 
 
 
 
 

Long Term Bias, Incentives, and Agency Costs

The problem of managerial short-termism has long preoccupied policymakers, researchers, and practitioners. These groups have given much less attention, however, to the converse problem of managerial long-termism. Michal Barzuza and Eric Talley fill this gap in their pioneering article, Long-Term Bias. Relying on the behavioral finance and psychology literatures, the authors provide a novel and thought-provoking analysis of managerial long-term bias, which may be just as detrimental as the more widely condemned short-term bias. This invited Comment to Barzuza and Talley’s article advances three claims. First, it argues that proper incentives—created by executive compensation, heightened risk of early termination, market responses and shareholder pressures—are likely to turn most managers more realistic and thus to mitigate their long-term biases. Second, it explains how, in reality, it could be almost impossible to distinguish between long-term bias and traditional agency theories of empire building and pet projects. Ultimately, both long-termist and self-interested managers systematically harm shareholders; both choose to ignore shareholder interests and waste free cash flow on inferior business investments. This also explains why the cure to both long-term bias and agency costs is similar: reducing the relative insulation of the board from shareholders’ disciplinary power. Finally, this Comment expresses strong support for most of Barzuza and Talley’s normative conclusions, with one important exception: their acceptance of the use of dual-class stock. With a perpetual lock on control and a limited equity stake, corporate leaders will be immune to any “institutional brake” on all forms of long-termist overinvestment. If anything, the analysis of Barzuza and Talley provides an additional strong justification to oppose the use of perpetual dual-class stock.