Innovation, short‐termism, and the cost of strong corporate governance

Abstract

Do the performance pressures of the capital market exacerbate short-termism and stifle innovation? This longstanding question has doggedly eluded a conclusive answer due to conflicting empirical findings. We revisit two studies that have been central to rejecting short-termism: Atanassov (2013) and its replication by Karpoff and Wittry (2018). After revising some of the empirical choices by Atanassov (2013), we find the opposite result: antitakeover laws that insulate managers from the market for corporate control enhance innovation, driven by firms with significant ownership by short-term oriented investors. However, antitakeover laws do exacerbate the pursuit of valuedestroying acquisitions. Our findings highlight corporate governance as a strategic variable that imposes a tradeoff in disciplining different agency conflicts and weak governance as a necessary evil to stimulate innovation. Managerial Summary: We present evidence that shareholder pressure indeed exacerbates short-termism and stifles innovation, especially in firms with significant ownership by short-term oriented investors. One key implication is that calls to reduce managerial entrenchment and hold managers more accountable to shareholders warrant careful consideration. While curbing other forms of agency conflict, such as managerial shirking and the pursuit of value-destroying

Balancing Shareholder Rights vs. Managerial Authority by Loyalty Shares

“…[8] This means if they cannot obtain enough immediate payoffs, they may not pay attention to those innovations anymore. [9] To summarise, there are two main types of short-termism, including shareholder-driven short-termism and manager-driven short-termism. And this is also the reason why it is difficult to balance shareholder rights and managerial authority.…”

Strategic Management Theory in a Post‐Pandemic and Non‐Ergodic World

“…Agents sometimes act in their own interests rather than in principals' interests. Most agency theory arguments centre on actions to maximize shareholder (principal) value (Keum, 2020). One issue of debate, even before the pandemic, was short-term versus long-term value.…”

The Market for Corporate Control and Risk‐taking: Evidence from Global Merger and Acquisition Laws

“…In a similar vein, both Kuttner (1986) and Auletta (1986) point out that managers who fall prey to takeover fears divert their attention to short‐term defensive tactics to support the short‐term prices and reduce long‐term capital investments. This corporate short‐sightedness would incentivize managers to chase short‐term targets to the extent of foregoing value‐relevant risk‐taking (Hayes and Abernathy, 2007; Ladika and Sautner, 2020; Keum, 2021).…”

“…Ladika and Sautner (2020) show that when their incentives become more short term, managers cut investment. Similarly, Keum (2021) maintains that a takeover threat could discourage innovation. Exploiting international setup, we extend this strand of the literature by showing how the MCC, as a governance tool, might discourage value-enhancing risk-taking by incentivizing managers to focus on short-termism.…”

“…The deterrence view posits that increased takeover threats could lead to managerial myopia (Zhao et al ., 2012). This could lead to lower risk‐taking of firms towards long‐term investments (Hayes and Abernathy, 2007; Ladika and Sautner, 2020; Keum, 2021). Alternatively, the MCC as a corporate disciplining tool improves corporate risk‐taking through improved monitoring of managerial performance and their propensity to overinvest (John, Litov and Yeung, 2008; Fauver et al ., 2017; Lu and Wang, 2018; Balachandran et al ., 2020).…”