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

Author

Listed:
  • Bartosz Olesiński

    (EY Poland)

  • Marek Rozkrut

    (EY Poland)

  • Andrzej Torój

    (Warsaw School of Economics)

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.

Suggested Citation

  • Bartosz Olesiński & Marek Rozkrut & Andrzej Torój, 2016. "Measuring the consequences of short-termism in business – the econometric evidence for a sample of European companies," Collegium of Economic Analysis Annals, Warsaw School of Economics, Collegium of Economic Analysis, issue 41, pages 63-78.
    • Handle: RePEc:sgh:annals:i:41:y:2016:p:63-78
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    References listed on IDEAS

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    5. SANJEEV BHOJRAJ & PAUL HRIBAR & MARC PICCONI & JOHN McINNIS, 2009. "Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analyst Forecasts," Journal of Finance, American Finance Association, vol. 64(5), pages 2361-2388, October.
    6. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
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    More about this item

    Keywords

    short-termism; market capitalization; ROE; GMM; panels;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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