IDEAS home Printed from https://ideas.repec.org/a/sgh/annals/i41y2016p63-78.html
   My bibliography  Save this article

Measuring the consequences of short-termism in business – the econometric evidence for a sample of European companies

Author

Listed:
  • Bartosz Olesiński

    (EY Poland)

  • Marek Rozkrut

    (EY Poland)

  • Andrzej Torój

    (Warsaw School of Economics)

Abstract

The problem of short-termism leads to too much focus of the executives on short- -term goals at the cost of long-term objectives of their firms. In order to investigate the consequences of this phenomenon, we use the panel data on 1024 of the largest companies listed on the European stock markets over the 1998–2013 period. In our econometric specifications, we measure the consequences of short-termism, distinguishing between the short- and long-run effects of CEO tenure on the company’s performance, approximated by its market capitalization and ROE. In order to investigate the impact of short-termism on the company’s performance in the short run and to account for the potential endogeneity of CEO tenure, we use the system GMM and compare it with more standard panel specifications. As regards the measurement of the long run impact of distinct variables on the company’s performance, we use the cross-sectional models based on the long-run transformations of our dataset. Our results show that the longer the CEO tenure, the better the company’s performance due to, among other things, a higher propensity to invest, which – despite adversely affecting company’s market capitalization in the short run – increases the company’s long-term value and average profitability.

Suggested Citation

  • Bartosz Olesiński & Marek Rozkrut & Andrzej Torój, 2016. "Measuring the consequences of short-termism in business – the econometric evidence for a sample of European companies," Collegium of Economic Analysis Annals, Warsaw School of Economics, Collegium of Economic Analysis, issue 41, pages 63-78.
    • Handle: RePEc:sgh:annals:i:41:y:2016:p:63-78
    as

    Download full text from publisher

    File URL: http://rocznikikae.sgh.waw.pl/p/roczniki_kae_z41_04.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. SANJEEV BHOJRAJ & PAUL HRIBAR & MARC PICCONI & JOHN McINNIS, 2009. "Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts," Journal of Finance, American Finance Association, vol. 64(5), pages 2361-2388, October.
    2. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    3. Suchard, Jo-Ann & Singh, Manohar & Barr, Robert, 2001. "The market effects of CEO turnover in Australian firms," Pacific-Basin Finance Journal, Elsevier, vol. 9(1), pages 1-27, January.
    4. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    5. Huson, Mark R. & Malatesta, Paul H. & Parrino, Robert, 2004. "Managerial succession and firm performance," Journal of Financial Economics, Elsevier, vol. 74(2), pages 237-275, November.
    6. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Boachie, Christopher & Mensah, Emmanuel, 2022. "The effect of earnings management on firm performance: The moderating role of corporate governance quality," International Review of Financial Analysis, Elsevier, vol. 83(C).
    2. Cristhian Mellado-Cid & Surendranath R. Jory & Thanh N. Ngo, 2018. "Real activities manipulation and firm valuation," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1201-1226, May.
    3. Manish Kumar & Madhu Vij & Rishabh Goswami, 2021. "Effect of Real Earnings Management on Firm Performance: Evidence from India," Vision, , vol. 27(3), pages 386-396, June.
    4. O’Connor, Matthew & Rafferty, Matthew & Sheikh, Aamer, 2013. "Equity compensation and the sensitivity of research and development to financial market frictions," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2510-2519.
    5. Igor Goncharov & Vasso Ioannidou & Martin C. Schmalz, 2020. "(Why) do central banks care about their profits?," ECONtribute Discussion Papers Series 018, University of Bonn and University of Cologne, Germany.
    6. El Diri, Malek & Lambrinoudakis, Costas & Alhadab, Mohammad, 2020. "Corporate governance and earnings management in concentrated markets," Journal of Business Research, Elsevier, vol. 108(C), pages 291-306.
    7. Chi, Jianxin (Daniel) & Gupta, Manu, 2009. "Overvaluation and earnings management," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1652-1663, September.
    8. Wen, Jun & Yang, Di & Feng, Gen-Fu & Dong, Minyi & Chang, Chun-Ping, 2018. "Venture capital and innovation in China: The non-linear evidence," Structural Change and Economic Dynamics, Elsevier, vol. 46(C), pages 148-162.
    9. Mircea Epure & Esteban Lafuente, 2015. "Monitoring bank performance in the presence of risk," Journal of Productivity Analysis, Springer, vol. 44(3), pages 265-281, December.
    10. Joanna Tyrowicz, 2007. "Blame No One ?Investment Decisions of the Polish Stock-Listed Companies," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 50(4), pages 391-410.
    11. Ikram, Atif & Li, Zhichuan (Frank) & Minor, Dylan, 2023. "CSR-contingent executive compensation contracts," Journal of Banking & Finance, Elsevier, vol. 151(C).
    12. Lafuente, Esteban & García-Cestona, Miguel Angel, 2019. "Managerial turnover and performance in outside boards: Ownership makes the difference," TEC Empresarial, School of Business, Costa Rica Institute of Technology (ITCR), vol. 13(3), pages 2-27.
    13. Binh Bui & Muhammad Nurul Houqe & Mahbub Zaman, 2021. "Climate change mitigation: Carbon assurance and reporting integrity," Business Strategy and the Environment, Wiley Blackwell, vol. 30(8), pages 3839-3853, December.
    14. Sun Hyun Park & Sung Hun (Brian) Chung & Nandini Rajagopalan, 2021. "Be careful what you wish for: CEO and analyst firm performance attributions and CEO dismissal," Strategic Management Journal, Wiley Blackwell, vol. 42(10), pages 1880-1908, October.
    15. Rami Salem & Ernest Ezeani & Xi Song, 2023. "The relationship between religiosity and voluntary disclosure quality: a cross-country evidence from the banking sector," Review of Quantitative Finance and Accounting, Springer, vol. 60(3), pages 983-1023, April.
    16. Christophe Pennetier & Karan Girotra & Jürgen Mihm, 2019. "R&D Spending: Dynamic or Persistent?," Manufacturing & Service Operations Management, INFORMS, vol. 21(3), pages 636-657, July.
    17. Çolak, Gönül & Korkeamäki, Timo, 2021. "CEO mobility and corporate policy risk," Journal of Corporate Finance, Elsevier, vol. 69(C).
    18. Halaoua, Sameh & Hamdi, Badreddine & Mejri, Tarek, 2017. "Earnings management to exceed thresholds in continental and Anglo-Saxon accounting models: The British and French cases," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 513-529.
    19. Daniel Ştefan Armeanu & Georgeta Vintilă & Ştefan Cristian Gherghina, 2017. "Empirical Study towards the Drivers of Sustainable Economic Growth in EU-28 Countries," Sustainability, MDPI, vol. 10(1), pages 1-22, December.
    20. Youngho Kang & Byung-Yeon Kim, 2018. "Immigration and economic growth: do origin and destination matter?," Applied Economics, Taylor & Francis Journals, vol. 50(46), pages 4968-4984, October.

    More about this item

    Keywords

    short-termism; market capitalization; ROE; GMM; panels;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sgh:annals:i:41:y:2016:p:63-78. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michał Bernardelli (email available below). General contact details of provider: https://edirc.repec.org/data/sgwawpl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.