What’s the evidence on short-termism?

Here was my attempt to sum it all up with links a few months back, as the introduction to a Q&A with Steve Kaplan about a paper he had on the subject:

McKinsey’s Dominic Barton has made the case, as has BlackRock’s Larry Fink. Politicians like Hillary Clinton and Joe Biden have warned against short-termism, as have scholars at Brookings and the American Enterprise Institute. McKinsey has made its case empirically, finding evidence linking long-term management to superior financial performance. In 2015 Rotman’s Roger Martin reviewed the evidence on both sides here at HBR and explained why he believed short-termism is a problem.

But not everyone agrees.

Economist Larry Summers says, in response to the McKinsey data, that the jury’s still out. The Economist calls short-termism a “slippery idea” and a “distraction.” The New Yorker calls it a “myth.” And we’ve published many pieces here at HBR taking issue in one way or another with the standard short-termism critique.

In a recent paper, University of Chicago Booth economist Steven Kaplan makes his own case against worrying about short-termism.

Here’s a similar effort by Noah Smith, who makes the case that short-termism is, in fact, a problem:

Back in June, I reported on a research paper by Steven Kaplan of the University of Chicago’s Booth School of Business, saying that the threat of short-termism was either nonexistent or exaggerated. But I also argued that the reasons Kaplan gives have major caveats or are of questionable relevance.

Other research has shown important evidence on the negatives of short-termism. A 2010 paper by economists John Asker, Joan Farre-Mensa and Alexander Ljungqvist found that closely held companies tend to invest more than similar publicly listed companies, and also tend to be quicker to respond to new investment opportunities. And a 2007 paper by Rudiger Fahlenbrach found that companies run by founder-chief executive officers tend to invest more in both capital goods, and research and development — investments that are rewarded with higher stock prices over the long term.

The evidence that short-termism might be harmful continues to pile up. A 2014 paperby Stanford University’s Shai Bernstein finds that when companies go public and face pressure for quick results from investors, their best inventors tend to leave, and the ones who remain produce fewer patents. Though patenting is a poor measure of innovation at the industry-wide level (since one company’s patents can hinder innovation by other companies), it’s a good indicator of the effort a company is putting into research. Bernstein’s paper also shows that once companies go public, they plow less of their resources into far-sighted R&D investments.

Meanwhile, economists German Gutierrez and Thomas Philippon have a recent paper investigating the causes of low business investment. They find that the more public companies are owned by institutional investors, the less they tend to invest.

Posting this mostly so I have the links to all these bits of evidence together in one place.