Mark Roe
 Upon closer inspection, the supposed negative consequences of investor short­termism appear not to be happening at all
Mark Roe
12
May
2016
|
00:00
Europe/Amsterdam

ShortTerm Talk, LongTerm Cost

Managers and boards can ignore shortterm trading activity - and they usually do

In 2015 Harvard Law professor Mark Roe wrote: "The idea that financial markets are too focused on the short term is gaining ground in the media and among academics. And now it is attracting political attention in the United States. Investors’ obsession with shortterm returns, according to the new conventional wisdom, compels corporate boards of directors and managers to seek impressive quarterly earnings at the expense of strong longterm investments. Research and development suffers, as does longterm investment in plant and equipment. Similarly, shortterm thinking leads major companies to buy back their stock, thereby sapping them of the cash they need for future investments. 

None of this is good news for the economy – at least, it wouldn’t be, if it were real. Upon closer inspection, the supposed negative consequences of investor short­termism appear not to be happening at all.

“Short term” need not connote something pernicious. It can mean flexibility and adaptability. Actions that are criticized as “shortterm thinking” may, in some cases, be steps toward abandoning old businesses and failed solutions, helping the company adjust to a changing economy."

 

 

About the author

Mark J. Roe is a professor at Harvard Law School, where he teaches corporate law and corporate bankruptcy. He wrote Strong Managers, Weak Owners: The Political Roots of American Corporate Finance (Princeton, 1994), Political Determinants of Corporate Governance (Oxford, 2003), and Bankruptcy and Corporate Reorganization (Foundation, 2011).