Short-term corporate behavior is a major problem in the 21st century firm. Too many companies prioritize quarterly earnings over long-term innovation, human capital investment, and brand development, and many people believe short-term shareholders are to blame. The popular argument goes as follows: Short-term investors – those who hold onto a stock for less than, say, a year – aren’t interested in the company’s prospects beyond that year. So, if the company misses its quarterly earnings target, they sell their shares. The fear of such selling forces the firm to fixate on meeting the target, cutting investment to do so. Moreover, since shareholders can sell at the drop of a hat, the firm has no stable source of long-term capital, and so cannot make long-term plans.
The Answer to Short-Termism Isn’t Asking Investors to Be Patient
We need to encourage larger stakes and a longer-term orientation.
July 18, 2017
Summary.
We must ensure that companies act in the long-term interest of all stakeholders, not just shareholders. However, laying the blame on short-term shareholders is shooting at the wrong target, and may actually make things worse. The error in the popular argument against short-term investors is that it confuses the holding period of a shareholder with her orientation. Short-term selling need not be based on short-term information. What matters is not whether shareholders hold for the long-term, but whether they trade on long-term information. The question is how to ensure the latter.