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.


Brad DeLong
Connect with us!

Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions!

Get in Touch