{"title":"The Macro Impact of Short-Termism","authors":"Stephen J. Terry","doi":"10.3982/ECTA15420","DOIUrl":null,"url":null,"abstract":"<p>R&D investment reduces current profits, so short-term pressure to hit profit targets may distort R&D. In the data, firms just meeting Wall Street forecasts have lower R&D growth and subsequent innovation, while managers just missing receive lower pay. But short-termist distortions might not quantitatively matter if aggregation or equilibrium dampen their impact. So I build and estimate a quantitative endogenous growth model in which short-termism arises naturally as discipline on conflicted managers and boosts firm value by about 1%. But short-termism reduces R&D, and the social return to R&D is higher than the private return due to standard channels including knowledge spillovers and imperfect competition. So at the macro level, short-termist distortions slow growth by 5 basis points yearly and lower social welfare by about 1%.</p>","PeriodicalId":50556,"journal":{"name":"Econometrica","volume":"91 5","pages":"1881-1912"},"PeriodicalIF":6.6000,"publicationDate":"2023-10-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"54","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Econometrica","FirstCategoryId":"96","ListUrlMain":"https://onlinelibrary.wiley.com/doi/10.3982/ECTA15420","RegionNum":1,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q1","JCRName":"ECONOMICS","Score":null,"Total":0}
引用次数: 54
Abstract
R&D investment reduces current profits, so short-term pressure to hit profit targets may distort R&D. In the data, firms just meeting Wall Street forecasts have lower R&D growth and subsequent innovation, while managers just missing receive lower pay. But short-termist distortions might not quantitatively matter if aggregation or equilibrium dampen their impact. So I build and estimate a quantitative endogenous growth model in which short-termism arises naturally as discipline on conflicted managers and boosts firm value by about 1%. But short-termism reduces R&D, and the social return to R&D is higher than the private return due to standard channels including knowledge spillovers and imperfect competition. So at the macro level, short-termist distortions slow growth by 5 basis points yearly and lower social welfare by about 1%.
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