Myopic management: Why is corporate management obsessed with quarterly earnings and what should be done about it?
Myopic management describes managers’ tendency to obtain short-term gains at the expense of potentially larger long-term profits. Myopic management is particularly present in public firms, which have to meet investors’ quarterly earnings expectations. As a result, practitioners often complain that being a publicly listed firm reduces managerial discretion to invest on long-term projects such as innovation.
Ingvar Kamprad, founder of Ikea, for instance, notes that “keeping companies like Ikea in private hands would secure the freedom to have a long-term view on investments and in business development” (Kamprad 2011). Likewise, the computer manufacturer Dell announced to take the company private in 2014 to “make decisions that aren’t just based on profits and revenues in the next quarter, but with a longer-term focus” (Devaney 2013, p.8).
Echoing this sentiment, business periodicals point out that companies should try to avoid “Wall Street’s obsession with quarterly earnings expectations” (Forbes 2003, p.174). Tellis (2013, p. 239) refers to the negative effects of the stock market on managerial decisions as the “Wall Street curse” and specifies that “pressure from investors on Wall Street causes managers to cut investments in innovation to boost current earnings and stock prices, at the cost of future innovation, growth, and long-term market cap.”
Academic literature also points to the threats of myopic management and the potentially devastating consequences for firm behavior (see for instance Graham et al. 2005; Mizik 2010; Chakravarty and Grewal 2011). Hence, a key question of interest for managers, investors, and policy makers alike is: How to curb the obsession with quarterly earnings and avoid myopic management?