IDEAS home Printed from https://ideas.repec.org/a/wly/emetrp/v91y2023i5p1881-1912.html
   My bibliography  Save this article

The Macro Impact of Short‐Termism

Author

Listed:
  • Stephen J. Terry

Abstract

R&D investment reduces current profits, so short‐term pressure to hit profit targets may distort R&D. In the data, firms just meeting Wall Street forecasts have lower R&D growth and subsequent innovation, while managers just missing receive lower pay. But short‐termist distortions might not quantitatively matter if aggregation or equilibrium dampen their impact. So I build and estimate a quantitative endogenous growth model in which short‐termism arises naturally as discipline on conflicted managers and boosts firm value by about 1%. But short‐termism reduces R&D, and the social return to R&D is higher than the private return due to standard channels including knowledge spillovers and imperfect competition. So at the macro level, short‐termist distortions slow growth by 5 basis points yearly and lower social welfare by about 1%.

Suggested Citation

  • Stephen J. Terry, 2023. "The Macro Impact of Short‐Termism," Econometrica, Econometric Society, vol. 91(5), pages 1881-1912, September.
  • Handle: RePEc:wly:emetrp:v:91:y:2023:i:5:p:1881-1912
    DOI: 10.3982/ECTA15420
    as

    Download full text from publisher

    File URL: https://doi.org/10.3982/ECTA15420
    Download Restriction: no

    File URL: https://libkey.io/10.3982/ECTA15420?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. David Burgstahler & Michael Eames, 2006. "Management of Earnings and Analysts' Forecasts to Achieve Zero and Small Positive Earnings Surprises," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5-6), pages 633-652.
    2. Bronwyn H. Hall & Jacques Mairesse & Benoit Mulkay, 1998. "Does cash flow cause investment and R&D: an exploration using panel data for French, Japanes and United States scientific firms," IFS Working Papers W98/11, Institute for Fiscal Studies.
    3. Eisfeldt, Andrea L. & Kuhnen, Camelia M., 2013. "CEO turnover in a competitive assignment framework," Journal of Financial Economics, Elsevier, vol. 109(2), pages 351-372.
    4. Borisova, Ginka & Brown, James R., 2013. "R&D sensitivity to asset sale proceeds: New evidence on financing constraints and intangible investment," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 159-173.
    5. Yufeng Wu, 2018. "What’s behind Smooth Dividends? Evidence from Structural Estimation," The Review of Financial Studies, Society for Financial Studies, vol. 31(10), pages 3979-4016.
    6. David Atkin & Azam Chaudhry & Shamyla Chaudry & Amit K. Khandelwal & Eric Verhoogen, 2017. "Organizational Barriers to Technology Adoption: Evidence from Soccer-Ball Producers in Pakistan," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(3), pages 1101-1164.
    7. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 749-804.
    8. Paul Oyer, 1998. "Fiscal Year Ends and Nonlinear Incentive Contracts: The Effect on Business Seasonality," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 149-185.
    9. Robert E. Lucas Jr. & Benjamin Moll, 2014. "Knowledge Growth and the Allocation of Time," Journal of Political Economy, University of Chicago Press, vol. 122(1), pages 1-51.
    10. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, August.
    11. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, April.
    12. Marina DRUZ & Alexander F. WAGNER & Alexander Richard J. ZECKHAUSER, 2015. "Tips and Tells from Managers: How Analysts and the Market Read Between the Lines of Conference Calls," Swiss Finance Institute Research Paper Series 15-02, Swiss Finance Institute.
    13. Murillo Campello & Rafael P. Ribas & Albert Y. Wang, 2014. "Is the Stock Market Just a Side Show? Evidence from a Structural Reform," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 3(1-2), pages 1-38.
    14. Jones, Charles I & Williams, John C, 2000. "Too Much of a Good Thing? The Economics of Investment in R&D," Journal of Economic Growth, Springer, vol. 5(1), pages 65-85, March.
    15. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115(1), pages 69-102.
    16. Gene M. Grossman & Elhanan Helpman, 1991. "Quality Ladders in the Theory of Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(1), pages 43-61.
    17. Jeffrey B. Liebman & Neale Mahoney, 2013. "Do Expiring Budgets Lead to Wasteful Year-End Spending? Evidence from Federal Procurement," NBER Working Papers 19481, National Bureau of Economic Research, Inc.
    18. Bartov, Eli & Givoly, Dan & Hayn, Carla, 2002. "The rewards to meeting or beating earnings expectations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 173-204, June.
    19. Blundell, Richard & Griffith, Rachel & Windmeijer, Frank, 2002. "Individual effects and dynamics in count data models," Journal of Econometrics, Elsevier, vol. 108(1), pages 113-131, May.
    20. Strebulaev, Ilya A. & Whited, Toni M., 2012. "Dynamic Models and Structural Estimation in Corporate Finance," Foundations and Trends(R) in Finance, now publishers, vol. 6(1–2), pages 1-163, November.
    21. Mark J. Zbaracki & Mark Ritson & Daniel Levy & Shantanu Dutta & Mark Bergen, 2004. "Managerial and Customer Costs of Price Adjustment: Direct Evidence from Industrial Markets," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 514-533, May.
    22. Thomas Sampson, 2016. "Dynamic Selection: An Idea Flows Theory of Entry, Trade, and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(1), pages 315-380.
    23. Dirk Jenter & Fadi Kanaan, 2015. "CEO Turnover and Relative Performance Evaluation," Journal of Finance, American Finance Association, vol. 70(5), pages 2155-2184, October.
    24. Chandra Kanodia & Haresh Sapra, 2016. "A Real Effects Perspective to Accounting Measurement and Disclosure: Implications and Insights for Future Research," Journal of Accounting Research, Wiley Blackwell, vol. 54(2), pages 623-676, May.
    25. Ian Larkin, 2014. "The Cost of High-Powered Incentives: Employee Gaming in Enterprise Software Sales," Journal of Labor Economics, University of Chicago Press, vol. 32(2), pages 199-227.
    26. Boris Nikolov & Toni M. Whited, 2014. "Agency Conflicts and Cash: Estimates from a Dynamic Model," Journal of Finance, American Finance Association, vol. 69(5), pages 1883-1921, October.
    27. Jeremy C. Stein, 1989. "Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 104(4), pages 655-669.
    28. Brown, James R. & Petersen, Bruce C., 2009. "Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 971-984, May.
    29. Haskel, J & Corrado, C & Jona-Lasinio, C & Iommi, M, 2012. "Intangible capital and growth in advanced economies: measurement methods and comparative results," Working Papers 9913, Imperial College, London, Imperial College Business School.
    30. Sebastian Calonico & Matias D Cattaneo & Max H Farrell, 2020. "Optimal bandwidth choice for robust bias-corrected inference in regression discontinuity designs," The Econometrics Journal, Royal Economic Society, vol. 23(2), pages 192-210.
    31. François Gourio & Leena Rudanko, 2014. "Customer Capital," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(3), pages 1102-1136.
    32. Tarek A. Hassan & Thomas M. Mertens, 2017. "The Social Cost of Near-Rational Investment," American Economic Review, American Economic Association, vol. 107(4), pages 1059-1103, April.
    33. Anne Beyer & Ilan Guttman & Iván Marinovic, 2014. "Optimal Contracts with Performance Manipulation," Journal of Accounting Research, Wiley Blackwell, vol. 52(4), pages 817-847, September.
    34. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    35. Katherine A. Gunny, 2010. "The Relation Between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence from Meeting Earnings Benchmarks," Contemporary Accounting Research, John Wiley & Sons, vol. 27(3), pages 855-888, September.
    36. Zeckhauser, Richard & Wagner, Alexander F. & Druz, Marina, 2015. "Reading Managerial Tone: How Analysts and the Market Respond to Conference Calls," CEPR Discussion Papers 10364, C.E.P.R. Discussion Papers.
    37. Peters, Ryan H. & Taylor, Lucian A., 2017. "Intangible capital and the investment-q relation," Journal of Financial Economics, Elsevier, vol. 123(2), pages 251-272.
    38. Per Krusell & Toshihiko Mukoyama & Aysegul Sahin & Anthony A. Smith, Jr., 2009. "Revisiting the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 393-402, July.
    39. Andrew G. Haldane & Richard Davies, 2012. "The Short Long," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
    40. David Burgstahler & Michael Eames, 2006. "Management of Earnings and Analysts' Forecasts to Achieve Zero and Small Positive Earnings Surprises," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(5‐6), pages 633-652, June.
    41. He, Jie (Jack) & Tian, Xuan, 2013. "The dark side of analyst coverage: The case of innovation," Journal of Financial Economics, Elsevier, vol. 109(3), pages 856-878.
    42. Imbs, Jean, 2007. "Growth and volatility," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1848-1862, October.
    43. Ron Kasznik & Maureen F. McNichols, 2002. "Does Meeting Earnings Expectations Matter? Evidence from Analyst Forecast Revisions and Share Prices," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 727-759, June.
    44. Murat Alp Celik & Xu Tian, 2023. "Agency Frictions, Managerial Compensation, and Disruptive Innovations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 16-38, December.
    45. Carol Corrado & Jonathan Haskel & Cecilia Jona-Lasinio & Massimiliano Iommi, 2013. "Innovation and intangible investment in Europe, Japan, and the United States," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 29(2), pages 261-286, SUMMER.
    46. Jesse Perla & Christopher Tonetti, 2014. "Equilibrium Imitation and Growth," Journal of Political Economy, University of Chicago Press, vol. 122(1), pages 52-76.
    47. Ellen McGrattan, 2020. "Intangible Capital and Measured Productivity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 147-166, August.
    48. James R. Brown & Steven M. Fazzari & Bruce C. Petersen, 2009. "Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom," Journal of Finance, American Finance Association, vol. 64(1), pages 151-185, February.
    49. Anastasia A. Zakolyukina, 2018. "How Common Are Intentional GAAP Violations? Estimates from a Dynamic Model," Journal of Accounting Research, Wiley Blackwell, vol. 56(1), pages 5-44, March.
    50. 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.
    51. Harrison Hong & Marcin Kacperczyk, 2010. "Competition and Bias," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(4), pages 1683-1725.
    52. David Berger & Joseph Vavra, 2015. "Consumption Dynamics During Recessions," Econometrica, Econometric Society, vol. 83, pages 101-154, January.
    53. Roychowdhury, Sugata, 2006. "Earnings management through real activities manipulation," Journal of Accounting and Economics, Elsevier, vol. 42(3), pages 335-370, December.
    54. Hansen, Bruce E. & Lee, Seojeong, 2019. "Asymptotic theory for clustered samples," Journal of Econometrics, Elsevier, vol. 210(2), pages 268-290.
    55. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, vol. 142(2), pages 698-714, February.
    56. Haskel, Jonathan & Iommi, Massimiliano, 2012. "Intangible Capital and Growth in Advanced Economies: Measurement and Comparative Results," CEPR Discussion Papers 9061, C.E.P.R. Discussion Papers.
    57. Steven J. Davis & John Haltiwanger, 1992. "Gross Job Creation, Gross Job Destruction, and Employment Reallocation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(3), pages 819-863.
    58. Mark T. Bradshaw & Richard G. Sloan, 2002. "GAAP versus The Street: An Empirical Assessment of Two Alternative Definitions of Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 41-66, March.
    59. Lucian A. Taylor, 2010. "Why Are CEOs Rarely Fired? Evidence from Structural Estimation," Journal of Finance, American Finance Association, vol. 65(6), pages 2051-2087, December.
    60. Young, Eric R., 2010. "Solving the incomplete markets model with aggregate uncertainty using the Krusell-Smith algorithm and non-stochastic simulations," Journal of Economic Dynamics and Control, Elsevier, vol. 34(1), pages 36-41, January.
    61. Bernstein, Shai, 2012. "Does Going Public Affect Innovation?," Research Papers 2126, Stanford University, Graduate School of Business.
    62. Oliver Levine & Brent Glover, 2014. "Idiosyncratic Risk and the Manager," 2014 Meeting Papers 736, Society for Economic Dynamics.
    63. Shai Bernstein, 2015. "Does Going Public Affect Innovation?," Journal of Finance, American Finance Association, vol. 70(4), pages 1365-1403, August.
    64. Marinovic, Iván & Ottaviani, Marco & Sorensen, Peter, 2013. "Forecasters’ Objectives and Strategies," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 690-720, Elsevier.
    65. Robert E. Hall, 2009. "Reconciling Cyclical Movements in the Marginal Value of Time and the Marginal Product of Labor," Journal of Political Economy, University of Chicago Press, vol. 117(2), pages 281-323, April.
    66. Gourieroux, Christian & Monfort, Alain, 1997. "Simulation-based Econometric Methods," OUP Catalogue, Oxford University Press, number 9780198774754.
    67. Harrison Hong & Jeffrey D. Kubik, 2003. "Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts," Journal of Finance, American Finance Association, vol. 58(1), pages 313-351, February.
    68. Robert E. Hall, 2004. "Measuring Factor Adjustment Costs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(3), pages 899-927.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Stephen Terry & Anastasia Zakolyukina & Toni Whited, 2018. "Information Distortion, R&D, and Growth," 2018 Meeting Papers 217, Society for Economic Dynamics.
    2. Stephen J. Terry & Toni M. Whited & Anastasia A. Zakolyukina, 2020. "Information versus Investment," Working Papers 2020-110, Becker Friedman Institute for Research In Economics.
    3. Pinchetti, Marco, 2020. "What Is Driving The TFP Slowdown? Insights From a Schumpeterian DSGE Model," MPRA Paper 98316, University Library of Munich, Germany.
    4. Christine L. Exley & Stephen J. Terry, 2019. "Wage Elasticities in Working and Volunteering: The Role of Reference Points in a Laboratory Study," Management Science, INFORMS, vol. 65(1), pages 413-425, January.
    5. Fromenteau, Philippe & Schymik, Jan & Tscheke, Jan, 2016. "Import Competition and the Composition of Firm Investments," Discussion Papers in Economics 29654, University of Munich, Department of Economics.
    6. Miettinen, Topi & Stenbacka, Rune, 2018. "Strategic short-termism: Implications for the management and acquisition of customer relationships," Journal of Economic Behavior & Organization, Elsevier, vol. 153(C), pages 200-222.

    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. Bird, Andrew & Karolyi, Stephen A. & Ruchti, Thomas G., 2019. "Understanding the “numbers game”," Journal of Accounting and Economics, Elsevier, vol. 68(2).
    2. Martin Nienhaus, 2022. "Executive equity incentives and opportunistic manager behavior: new evidence from a quasi-natural experiment," Review of Accounting Studies, Springer, vol. 27(4), pages 1276-1318, December.
    3. Acharya, Viral & Xu, Zhaoxia, 2017. "Financial dependence and innovation: The case of public versus private firms," Journal of Financial Economics, Elsevier, vol. 124(2), pages 223-243.
    4. Xia, Jingjing, 2023. "Redrawing the line: Narrowly beating analyst forecasts and journalists’ co-coverage choices in earnings-related news articles," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    5. Chang, Chu-Hsuan & Lin, Hsiou-Wei William, 2018. "Does there prevail momentum in earnings management for seasoned equity offering firms?," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 111-129.
    6. Li, Zhaochu & Lytvynenko, Iryna P. & Philippoff, Karl S., 2021. "Stock market reactions to R&D cuts used to manage earnings," International Review of Financial Analysis, Elsevier, vol. 77(C).
    7. Doyle, Jeffrey T. & Jennings, Jared N. & Soliman, Mark T., 2013. "Do managers define non-GAAP earnings to meet or beat analyst forecasts?," Journal of Accounting and Economics, Elsevier, vol. 56(1), pages 40-56.
    8. 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.
    9. Barrero, Jose Maria, 2022. "The micro and macro of managerial beliefs," Journal of Financial Economics, Elsevier, vol. 143(2), pages 640-667.
    10. Xu Tian, 2022. "Uncertainty and the Shadow Banking Crisis: Estimates from a Dynamic Model," Management Science, INFORMS, vol. 68(2), pages 1469-1496, February.
    11. Marco Navone & Thomas To, 2020. "Corporate watchdogs," Financial Management, Financial Management Association International, vol. 49(4), pages 925-947, December.
    12. Badryah Alhusaini & Kimball L. Chapman & Hal D. White, 2023. "Private disclosure and myopia: evidence from the JOBS act," Review of Accounting Studies, Springer, vol. 28(3), pages 1570-1617, September.
    13. Zhang, Yiyang & Perols, Johan & Robinson, Dahlia & Smith, Thomas, 2018. "Earnings management strategies to maintain a string of meeting or beating analyst expectations," Advances in accounting, Elsevier, vol. 43(C), pages 46-55.
    14. Yuan‐Teng Hsu & Chia‐Wei Huang, 2020. "Why do stock repurchases change over time?," European Financial Management, European Financial Management Association, vol. 26(4), pages 938-957, September.
    15. Emmanuel Mamatzakis & Anna Bagntasarian, 2021. "The nexus between CEO incentives and analysts' earnings forecasts," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 6205-6248, October.
    16. Campa, Domenico, 2019. "Earnings management strategies during financial difficulties: A comparison between listed and unlisted French companies," Research in International Business and Finance, Elsevier, vol. 50(C), pages 457-471.
    17. He, Jie (Jack) & Tian, Xuan, 2013. "The dark side of analyst coverage: The case of innovation," Journal of Financial Economics, Elsevier, vol. 109(3), pages 856-878.
    18. Al Mabsali, Yousuf Khamis & Hayward, Robert & Eliwa, Yasser, 2021. "Managerial tools used to meet or beat analyst forecasts: Evidence from the UK," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 43(C).
    19. Gilliam, Thomas A. & Heflin, Frank & Paterson, Jeffrey S., 2015. "Evidence that the zero-earnings discontinuity has disappeared," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 117-132.
    20. Ulrike Malmendier, 2018. "Behavioral Corporate Finance," NBER Working Papers 25162, National Bureau of Economic Research, Inc.

    More about this item

    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:wly:emetrp:v:91:y:2023:i:5:p:1881-1912. 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: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/essssea.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.