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?

Cohen, Daniel A., and Paul Zarowin. “Accrual-based and real earnings management activities around seasoned equity offerings.” Journal of accounting and Economics 50.1 (2010): 2-19.

Devaney, Tim (2013), “Dell Going Private to Reinvent Itself,” The Washington Times, (February 6), [available at https://www.washingtontimes.com/news/2013/feb/5/dell-founder-plans-24-billion-buyback/?page=all]

Forbes (2003), “Private Business,” (November 24), [available https://www.forbes.com/consent/?toURL=https://www.forbes.com/free_forbes/2003/1124/174.html

Graham, John R., Campbell R. Harvey, and Shiva Rajgopal. “The economic implications of corporate financial reporting.” Journal of accounting and economics 40.1-3 (2005): 3-73.

Jacobson, Robert, and David Aaker. “Myopic management behavior with efficient, but imperfect, financial markets: A comparison of information asymmetries in the US and Japan.” Journal of Accounting and Economics 16.4 (1993): 383-405.

Kamprad, Ingvar (2011), “Ingvar Kamprad Comments: We Are Open About the Way We Are Structured,” (January 11), [available at http://www.ikea.com/at/de/about_ikea/newsitem/statement_Ingvar_Kamprad_ comments#].

Mizik, Natalie. “The theory and practice of myopic management.” Journal of Marketing Research 47.4 (2010): 594-611.

Mizik, Natalie, and Robert Jacobson. “Myopic marketing management: Evidence of the phenomenon and its long-term performance consequences in the SEO context.” Marketing Science 26.3 (2007): 361-379.

Roychowdhury, Sugata. “Earnings management through real activities manipulation.” Journal of accounting and economics42.3 (2006): 335-370.

Tellis, Gerard J. (2013), Unrelenting Innovation: How to Create a Culture of Market Dominance. San Francisco: Jossey-Bass.

Xu, Randall Zhaohui, Gary K. Taylor, and Michael T. Dugan. “Review of real earnings management literature.” Journal of Accounting Literature 26 (2007): 195-228

Scientific Partner

Supporting Researcher

Simone Wies

Simone Wies

Simone Wies holds the professorship of Marketing Strategy & Performance at Goethe University Frankfurt. Previously, she was a Junior Professor of Marketing and Finance at the Leibniz Institute for Financial Research SAFE at Goethe University and a Post-Doctoral Researcher at the Fuqua School of Business, Duke University. She received her M.Sc. in Marketing and Finance and her Ph.D. in Finance from Maastricht University. In her research, Simone Wies focuses on the interactions between financing strategies and marketing decisions of firms, with a particular focus on innovation strategies. She studies, for example, how capital markets evaluate marketing decisions and innovation projects, and how these evaluations in turn influence the strategic decisions that managers make. In addition to her research, she teaches in the Marketing Analytics M.Sc. programme, is Director of the Marketing Specialisation in the B.Sc. programme and Director of the Marketing Ph.D. track of the Graduate School of Economics, Finance, and Management.