Missing the Target: A Review of Mark Roe's New Book on U.S. Stock-Market Short-Termism

Abstract

The narrative of pervasive short-termism caused by the stock market, and the need to protect corporations and the economy from it, is now a well established one. Frenetic short-term trading and aggressive activists chasing immediate increases in profit prevent corporations from thinking about the requirements for their own long-run success. Institutional investors squeeze cash out of the corporate sector by pressuring companies into excessive share buybacks instead of supporting long-term investments in R&D and skills development. The relentless pressure for short-term results also causes companies to neglect long-term social problems like climate change, human rights, and inequality as they seek to meet the stock market's expectations for quarterly earnings.

That this set of views is so widely accepted, and allowed to pass unchallenged, even in relatively sophisticated business and policy-making circles, makes Mark Roe's new book particularly important and timely. In a measured, balanced, and utterly non-polemical fashion, and using the highest quality academic evidence, the Harvard Law professor weighs the evidence for and against the charge that stock-market short-termism is a serious problem for the U.S. economy. Spoiler alert: he finds that there is no compelling case to answer. Stock-market-driven short-termism is at most a minor problem.

This finding matters because rather than railing against share buybacks, putting sand in the wheels of shareholder activism, and seeking to insulate corporate managers from investor pressure, Professor Roe contends that our policymakers should instead be focusing action on areas that are much more likely to have positive outcomes for society. Chief among them have been failure to resist the persistent decline in government-funded (not corporate sector) R&D or to beef up regulation and regulatory staffing to ensure that companies bear the costs of externalities that are currently offloaded onto society.

While ignoring these opportunities, we continue to devote too much attention to policies and actions—such as efforts to tax buybacks and limit shareholder activism—that are bound to be ineffective at best, and counterproductive at worst. Missing the Target is essential reading for policymakers, regulators, and anyone else interested in corporate governance, financial markets, and regulation that can and will actually make a positive difference to the rest of us.