A measure of short-termism and its effect on shareholder returns in the JSE

Abstract

The increased focus on short-termism was brought to the fore after the global financial crisis wherein agents of financial intermediation and policy makers alike sought to devote their time and resources towards the silent plague sweeping the economy. Short termism, is a multi-disciplinary construct, which, if distilled down to its basic form can be thought of as a systematic set of characteristics which over-values short term rewards at the expense of undervaluing long-term consequences. Arguably, the greatest cost of short termism lies in the opportunity costs associated with forgone investments. Many scholars advocate for the sustainable benefit that managing for the long-term however this is met by scepticism and debate as empirical evidence to support this avocations are sparse. This is largely because short-termism itself cannot be quantified by a singular concept or an isolated metric. This research study represents a quantitative, quasi-experimental, longitudinal study which aims to utilize a combination of financial measures, underpinned by financial theory to construct a measurable, composite index. This index then forms the basis of an investment style with which to track shareholder returns over a 20 year period in order to determine if short termism truly decreases shareholder value over time. The key findings is that through the use of the index, firms did display significant differences in their patterns of investments and earnings management within the same industry, however there is no significant evidence that managing for the short (or long) term is particularly effective at generating positive abnormal returns