Companies we classify as “long term” outperform their shorter-term peers on a range of key economic and financial metrics
The McKinsey Global Institue
15
February
2017
|
15:35
Europe/Amsterdam

DISCUSSION PAPER - Measuring the economic impact of short-termism

A fact base for this ongoing debate through a systematic measurement of long- and short-termism at the company level

Corporate short-termism has been the subject of ongoing debate among leaders in business, government, and academia for more than 30 years, with much of the discussion focusing on whether it destroys value. Recent surveys of C-suite executives that we have conducted suggest that pressure to deliver strong short-term results has increased in the past five years and, as a result, many executives believe their companies are using excessively short time horizons in their strategic planning. However, evidence that short-termism genuinely detracts from corporate performance and economic growth has remained scarce, partly because of difficulties in measuring the phenomenon, which does not correspond to any single quantifiable metric and is a confluence of many complex factors.

This discussion document aims to provide a fact base for this ongoing debate through a systematic measurement of long- and short-termism at the company level. Using a data set of 615 large- and mid-cap US publicly listed companies from 2001-2015, we have created a five-factor Corporate Horizon Index. It is based on patterns of investment, growth, earnings quality, and earnings management. It enables us to separate long-term companies from others and compare their relative performance, after controlling for industry characteristics and company size. Our findings show that companies we classify as “long term” outperform their shorter-term peers on a range of key economic and financial metrics.

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About the authors

Authors: Dominic Barton, James Manyika, Timothy Koller, Jonathan Godsall and Joshua Zoffer.

The partners of McKinsey fund MGI’s research; it is not commissioned by any business, government, or other institution. For further information about MGI and to download reports, please visit www.mckinsey.com/mgi