A Theory of Efficient Short-termism∗

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...

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...

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

The Effect of Activists’ Short-Termism on Corporate Governance

Does activist investors’ focus on short-term stock prices impede their role in improving corporate governance? This model builds on the notion that both the act of intervention and the threat of an intervention can generate value for the target firm. We demonstrate that an activist with short-termism intervenes excessively (insufficiently) when her ability to conduct a value-enhancing intervent...