Must-Read: Stephen J. Terry: The Macro Impact of Short-Termism

Must-Read: Stephen J. Terry: The Macro Impact of Short-Termism:

Managerial short-termism… I examine through the lens of analyst earnings targets.

Managers face a tradeoff between short-run profits and long-run investment…. Firms that just meet earnings targets lower their investment in R&D and intangibles. Firms that just miss their earnings targets cut CEO pay and face drops in stock-market valuation…. A quantitative general equilibrium endogenous growth model with heterogeneous firms, R&D and accounting manipulation choices, and endogenous earnings forecasts. In the model, the short-run pressure to meet earnings forecasts cuts growth because R&D is misallocated across firms…. This effect cuts growth rates by almost 0.1%, costing the US economy around 6% of output each century. Extending the model to include managerial shirking and empire-building reveals that earnings targets can improve firm value but may still reduce long-run growth and consumer welfare.

AUTHORS:

Brad DeLong
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