Implications of Short-termism: Measuring the Business Implications of Perceived Corporate Short-termism

Christoffer Sho Togo Tullin & Martin Post Hofmann

Student thesis: Master thesis

Abstract

This thesis examines the perceived phenomenon of corporate short-termism, which is defined as the excessive focus on short-term gains at the expense of long-term value creation. We attempt to identify and measure the implications of short-termism through empirical analyses comprising S&P 500 companies per May 2020. Based on a systematic review of the existing literary body, we include a series of variables that we believe are relevant test metrics in order to identify and measure implications of short-termism. Specifically, we test 1) the correlation between average CEO tenure and respectively the investors’ investment portfolio turnover rate, investment growth variables, pay-out ratio growth rates, and usage of discretionary accruals; 2) the effect of the selected test variables for short-termism on short-term performance; and 3) the effect of the selected test variables for short-termism on longer-term performance. In line with expectations, we observe that companies with longer CEO tenures attract investors with a longer investment horizon. However, the empirical findings indicate a generally low level of explanatory power between CEO tenure and the other test variables. When testing the short-and longer-term performance effects of the various test variables, we find a positive and quite significant effect of longer CEO tenures on short-term performance. This effect is highly significant and even stronger in the long run, which is in line with expectations that long-term companies measured by CEO tenures outperform their short-term counterparts. However, the findings for the other test variables are largely insignificant and some of the results are implications of the opposite of the hypothesised expectations. Thus, the overall results from the performance tests are mixed. Consequently, we cannot provide sufficient evidence of the effects of implications for short-termism through the conclusions of this thesis. However, the significant implications of CEO tenure as a stand-alone metric signifies a noteworthy contribution to the research body.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages174