Study examines if US firms are becoming more short-term oriented

an image of a bright red clock on a yellow background

Whether US firms have become more short-term oriented remains an active debate among managers, investors, researchers, and policymakers. Diving into the discussion to view what the data says, Yuan Shi, assistant professor of management and organizations at the School of Hotel Administration, and fellow researchers looked at publicly listed US firms from 1980 to 2013 in order to answer this question.

Assistant Professor Yuan Shi
Assistant Professor Yuan Shi

Through their research, Shi and colleagues determined  that firms were actually becoming more short-term oriented across the market on average. This conclusion was drawn from data that found  investors increasingly discounted the expected future returns of public firms over the last three decades.

Several factors are said to be contributing to this mentality, the researchers said, including the patience of investors, the types of investments a particular firm makes, CEO compensation, and external pressures from the environment such as activist investors and market analysts.

Implications

Shi and colleagues argue that this evolution towards more short-term thinking by firms has serious implications on a company’s strategy as well as impacts on the market as a whole. For example, if companies focus solely on the short term, their strategic decisions may not be aligned with their long-term interests. Such companies also risk ignoring areas that contribute to maintaining or increasing their value over the long term through long-term initiatives, such as corporate sustainability, research and development, and employee training to name only a few. The evidence found within this study can help firms understand the evolving business and market trends, enabling them to develop more effective long term strategies.

The Data

Specifically, to gain a data-driven understanding of such businesses ‘time horizon’ trends (the period of time one expects to hold an investment until they need the money back) the researchers calculated a firm’s implied discount rates, which showed how much investors are discounting cash flows. To corroborate a link with firm time horizons, the researchers estimate the relationship between an implied discount rate (IDR) and factors relevant to firm long-term strategy. The researchers found that IDR is correlated in expected ways with firm investments, management incentives, financial health, ownership, and external pressures—measures that have been argued to correlate with firm time horizons.

Faculty expertise

Shi received his PhD in Strategic Management and Entrepreneurship from the Robert H. Smith School of Business at the University of Maryland. His research explores the long-term implications of the evaluation processes in the market, such as ranking, funding, and pricing, for innovation and entrepreneurship. He has studied a wide range of sectors, including entertainment, technology, and venture capital. Shi’s research has been supported by the National Science Foundation and the Strategy Research Foundation.

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