Investor short-termis and managerial myopia : irrational behaviour or human nature
Inaugural lecture delivered on 13 August 2015
ENGLISH ABSTRACT : The world seems to be moving faster and faster. Bombarded with an ever-expanding stream of new information and facing rapid technological change, we are experiencing intensified pressure to deliver immediate results. Nowhere is this more apparent than in capital markets. Investors harness sophisticated technology to gather, analyse and interpret information and react to new information almost instantaneously. Corporate managers’ ability to churn out satisfactory returns to shareholders is under constant scrutiny. In the era of “quarterly capitalism” (Barton, 2011: 86; Millon, 2002: 890), time is indeed money – requiring measurement “in nanoseconds rather than milliseconds” (Budish, Cramton & Shim, 2015). Surviving in such a fast-paced environment requires the ability to keep abreast of technological change, leading to significant changes in our behaviour. Advances in technological innovation not only influence how we behave, however, but may also have an impact on the way we think. Adapting to the challenges of the information revolution may have produced a neurological rewiring of our brain (Carr, 2011), resulting in a shortened attention span (Haldane & Davies, 2011: 1). The benefits associated with technological innovation therefore may have come at a cognitive cost. Despite concerns regarding increased shortsighted behaviour by shareholders and corporate management being raised by the business community for some time, empirical evidence assessing the causes and the consequences of this change in behaviour remains limited (Dallas, 2012: 268; Bøhren, Priestley & Ødegaard, 2009: 3). Given our poor understanding of the role short-termism played during the global financial crisis, I find myself sharing the concerns of those who feel that, if left unchecked, short-termism could severely disrupt long-term sustainable value creation (Davies, Haldane, Nielsen & Pezzini, 2014: 16; Dallas, 2012: 269; Rappaport, 2011: 5; Dobbs, 2009: 127). In this inaugural address, I will discuss how shorttermism impacts on corporate finance. I will start by providing an overview of short-termism by explaining how it influences our behaviour and the resulting impact on financial markets. Given the damaging consequences increased investor short-termism and managerial myopia could have on corporate performance and sustainability, I will then reflect on whether technological innovation and inappropriate incentives could have contributed to these two forms of short-termism. In conclusion, I will identify ways to reduce short-termism by referring to some of the problem areas I have identified.