Investor short-termism and real investment

Optimal Short-Termism∗

This paper studies incentives in a dynamic contracting framework of a levered firm. In particular, the manager selects long-term and short-term efforts, while shareholders choose initially optimal leverage and ex-post optimal default policies. There are three results. First, shareholders trade off the benefits of short-termism (current cash flows) against the benefits of higher growth from long...

Agency Conflicts over the Short and Long Run: Short-Termism, Long-Termism, and Pay-for-Luck∗

We develop a dynamic agency model in which the agent controls current earnings via short-term effort and firm growth via long-term effort and the firm is subject to both shortand long-run shocks. Under the optimal contract, agency conflicts can induce both overand underinvestment in shortand long-term efforts compared to first best, leading to shortor long-termism in corporate policies. Exposur...

Industry Structure, Executive Pay, and Short-Termism

This study outlines a new theory linking industry structure to optimal employment contracts and executive short-termism. Firms hire their executives using optimal contracts derived within a competitive labour market. To motivate effort firms must use some variable remuneration. Such remuneration introduces a myopia problem: an executive would wish to inflate early expected earnings at some risk...

A Theory of Efficient Short-termism∗

This paper develops a theory of efficient short-termism—the shareholders prefer shorttermism in project choice. Unlike previous theories, managers themselves prefer long-horizon projects, whereas short-termism maximizes firm value in the second-best case with optimal output-contingent wage contracts. Short-termism benefits the firm because it limits the managerial rent extraction that occurs wi...

Short-termism in business: causes, mechanisms and consequences APPENDIX