Is Managerial Myopia a Persistent Governance Problem?

Critics of U.S. corporations have long argued that companies are overly focused on short‐term results and, as a consequence, sacrifice their own long‐run value and competitiveness. These criticisms have expanded in recent years to include those from prominent politicians, investors, consultants, and academics. If such criticisms have merit, they would imply a massive governance failure in which there has been decades of underinvestment with little adjustment on the part of managers, boards, or the market for corporate control. This article evaluates the economic underpinnings of these criticisms and analyzes their implications in the context of empirical evidence produced by several decades of research on corporate investment policies, the outcomes of corporate control events, investor horizons, and the market pricing of companies with little if any earnings. In reviewing the findings of these studies, the author finds little evidence to support the view that U.S. companies sacrifice long‐run value and competitiveness by systematically underinvesting. First, although U.S. companies have indeed cut back on tangible investments such as property, plant, and equipment, these cutbacks have been more than offset by the dramatic growth in investment in intangibles, such as spending on developing knowledge capital, brand‐building, and IT infrastructure. Second, when subjected to events that have the effect of reducing managerial control over investment policies and transferring control to outside investors—such as leveraged buyouts and recapitalizations, forced CEO dismissals, and shareholder activist campaigns—companies tend to reduce, not increase, investment spending. In fact, it is difficult to find any corporate control threats that have had the goal or effect of increasing investment. Third, and at the same time, the rising concentration of large institutional investors, including indexers such as BlackRock and Vanguard, suggests that investors have become, if anything, more long‐term oriented over time. Fourth, there is no evidence that the market shuns companies that have yet to report large (or indeed any) earnings. These findings suggest that curbing overinvestment, and not discouraging myopia and underinvestment, may well still be the larger corporate governance challenge facing investors when monitoring and attempting to influence the performance of U.S. companies.