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Measuring the consequences of short-termism in business – the econometric evidence for a sample of European companies

Bartosz Olesiński, Marek Rozkrut () and Andrzej Torój ()
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Bartosz Olesiński: EY Poland

Collegium of Economic Analysis Annals, 2016, issue 41, 63-78

Abstract: The problem of short-termism leads to too much focus of the executives on short- -term goals at the cost of long-term objectives of their firms. In order to investigate the consequences of this phenomenon, we use the panel data on 1024 of the largest companies listed on the European stock markets over the 1998–2013 period. In our econometric specifications, we measure the consequences of short-termism, distinguishing between the short- and long-run effects of CEO tenure on the company’s performance, approximated by its market capitalization and ROE. In order to investigate the impact of short-termism on the company’s performance in the short run and to account for the potential endogeneity of CEO tenure, we use the system GMM and compare it with more standard panel specifications. As regards the measurement of the long run impact of distinct variables on the company’s performance, we use the cross-sectional models based on the long-run transformations of our dataset. Our results show that the longer the CEO tenure, the better the company’s performance due to, among other things, a higher propensity to invest, which – despite adversely affecting company’s market capitalization in the short run – increases the company’s long-term value and average profitability.

Keywords: short-termism; market capitalization; ROE; GMM; panels (search for similar items in EconPapers)
JEL-codes: C33 C36 D22 M10 M12 (search for similar items in EconPapers)
Date: 2016
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Handle: RePEc:sgh:annals:i:41:y:2016:p:63-78