Journal Article

Explaining corporate short-termism: self-reinforcing processes and biases among investors, the media and corporate managers

Jaakko Aspara, Kalle Pajunen, Henrikki Tikkanen and Risto Tainio

in Socio-Economic Review

Volume 12, issue 4, pages 667-693
Published in print October 2014 | ISSN: 1475-1461
Published online May 2014 | e-ISSN: 1475-147X | DOI: https://dx.doi.org/10.1093/ser/mwu019
Explaining corporate short-termism: self-reinforcing processes and biases among investors, the media and corporate managers

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  • Moral Philosophy
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  • Welfare Economics
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  • Economic Sociology

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Based on the related literature in economics, organizational sociology and the sociology of finance, this article constructs a novel conceptual explanation for corporate short-termism, that is, the tendency of corporate managers to sacrifice long-term investments to improve short-term earnings (STEs). We theorize about how such corporate short-termism emerges, at least partly, from systemic, self-reinforcing processes across various communities of actors including investors, the media and managers themselves. In doing so, we refute the common notion that corporate short-termism is caused by an inherent preference of investors or other actors to focus on STEs. Consequently, the systemic perspective offered by this article questions some conventional assumptions about the roots of corporate short-termism and emphasizes the influence of coordination mechanisms and behavioural biases in giving rise to self-reinforcing loops.

Keywords: corporate finance; firm strategy; markets; media; corporate short-termism; G02 behavioral finance: underlying principles; G30 corporate finance and governance, general; D84 expectations, speculations

Journal Article.  10000 words.  Illustrated.

Subjects: Moral Philosophy ; Corporate Social Responsibility ; Welfare Economics ; Political Economy ; Economic Sociology

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