In the Long Run, Fear of Short-Termism Is Mostly Bunk

Is the economy suffering from CEOs pushed by investors to focus only on the next quarter? The evidence shows it isn’t

By James Mackintosh of The WSJ. Excerpts:

"We can go beyond anecdotes. Harvard Law School professor Mark Roe points out in a forthcoming paper that there should be three effects, if short-termism really has spread from Wall Street to management. R&D should be lower, since it has costs today for uncertain benefits in the future; business investment should fall faster in the U.S. than countries less reliant on stock exchanges; and corporate cash should be lower as shareholders demand it back via buybacks and dividends.

None has happened. R&D spending by S&P 500 companies is at the highest proportion of sales since at least 1990, according to Goldman Sachs. Business R&D is the highest proportion of GDP since the government started tracking it in 1959. If short-termism is a problem, it isn’t obviously hurting overall R&D spending."

"Capital spending has dropped as a share of sales and GDP over many years—but it has dropped in Germany and Japan too, countries notable for not being sensitive to shareholder desires. The broad pattern of falling corporate capital spending is mirrored across industrialized countries"

"The surge in share buybacks is often held up as short-termism writ large. But companies by and large aren’t buying back stock with cash that could instead be invested for the future. They are borrowing to pay for the buybacks, taking advantage of low interest rates, and aren’t deprived of cash as a result."