Sampson, working with Smith PhD graduate Yuan Shi, now at Cornell University, looked at short-termism, or quarterly capitalism. It happens when companies focus on returning money to shareholders each quarter, rather than spending money on productivity improvements or on research and development for their next big innovation.
And it’s dragging down the U.S. economy, but also pumping up equity portfolios, Sampson says.
In their study published in Strategic Management Journal, Sampson and Shi apply a new quantitative measure to definitely show that U.S. capital markets have become increasingly short-term oriented in recent decades – answering a question long-debated by managers, researchers, investors and policymakers. The researchers looked at firms listed on major U.S. stock exchanges from 1980 to 2013.
They calculated an implied discount rate for firms, which quantifies how much investors are discounting a firm’s future expected cash flows. The researchers found a strong link between the implied discount rate and a firm’s short-term-oriented behavior.
They found firms increasingly short-term oriented, on average, across the market, with the trend showing up in the vast majority of individual firms. The extent to which a firm is short-term oriented relates to several factors, say the researchers, including the patience of investors, the types of investments the firm makes, the way CEOs are compensated and external pressures, such as activist investors and market analysts.
Sampson suggests some drivers of this change: “Some potential explanations include rising exposure to globalization and the increasing pace of technological change that may make firms more impatient for returns and less willing to take on the risks associated with longer‐term investments.”
If firms focus only on the short-term, their strategic decisions may not be aligned with their long-term interests, Sampson says. They risk ignoring areas that can create value over the long-term – sustainable supply chains, research and development, capital projects, employee training, and other longer-term initiatives.
The implications for the wider economy are stark. “It’s fair to say that a short-term perspective has the potential to undermine the traditional growth engines of the American economy, and bankrupt our future,” Sampson says.