Custodes Futurifor the advancement of humanity

Economic factor, barrier 5 of 6

Misaligned incentives and short-termism

Quarterly earnings pressure and election cycles reward short-term results over long-term research, infrastructure, and climate investment.

Evidence

  • Executive survey. In a survey of 401 financial executives plus 20 interviews, 78% said they would give up long-term economic value to smooth reported earnings, and many would delay valuable projects to meet short-term targets (Graham, Harvey, and Rajgopal, 2005).
  • Public versus private firms. Comparing matched U.S. firms, private firms invested nearly 10% of assets a year against about 4% for public firms, and were about four times more responsive to new investment opportunities. Firms invested more in the five years before going public than after (Asker, Farre-Mensa, and Ljungqvist, 2015).
  • Limits. The survey measures stated willingness, not observed decisions, and the firm comparison assumes private firms face less short-term pressure. Later studies using other data found public firms invest as much or more (Gilje and Taillard, 2016, Feldman et al., 2021), so the finding is debated.

Proposed and experimental methods

Methods that are proposed, under trial, approved in some places, or tried and then failed. Each shows a stage label and an evidence rating. A stage label shows how far a method has progressed, not whether it works. The stage labels are explained on the economic factor page.

  • Ending mandatory quarterly reporting (Approved but not scaled, contested, C). The UK removed the requirement for listed companies to publish quarterly interim statements from November 7, 2014, ahead of an EU-wide change (FCA, 2014). Of 471 UK companies studied, fewer than 9% (45) stopped quarterly reporting by the end of 2015, and reporting frequency had no material effect on corporate investment (Pozen, Nallareddy, and Rajgopal, 2017). In contrast, studies of increases in reporting frequency found an "economically large" decline in investment among U.S. firms between 1950 and 1970 (Kraft, Vashishtha, and Venkatachalam, 2018) and more short-term manipulation of real activities among EU firms required to report quarterly (Ernstberger et al., 2017). On May 5, 2026, the U.S. SEC proposed letting companies file semiannual instead of quarterly reports, with comments due July 6, 2026 (Deloitte, 2026).
  • Long-Term Stock Exchange (Approved but not scaled, C). A U.S. stock exchange whose listed companies must publish policies on long-term strategy, important stakeholders, environmental impact, and how pay links to their long-term vision. It opened around September 2020 and its first listings, Twilio and Asana, began on August 26, 2021 as dual listings alongside the NYSE (Harty, 2021). Twilio delisted in 2022, and in May 2023 ThredUp became only the second company then listed (CNBC, 2023). No study of effects on company behavior was found.
  • Not shown to help: Extra votes for long-term shareholders by default (Approved but not scaled, B). France's 2014 Florange Act gives double voting rights to shares held for at least two years unless a company votes to opt out. Firms that adopted these rights by default saw long-term foreign institutional ownership fall and insider or family ownership rise, and they underperformed on stock returns and on environmental and social measures compared with firms that opted out (Bourveau, Brochet, and Garel, 2022).

Sources cited on this page

  1. Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40(1-3), 3-73. DOI B Moderate
  2. Asker, J., Farre-Mensa, J., & Ljungqvist, A. (2015). Corporate investment and stock market listing: a puzzle? Review of Financial Studies, 28(2), 342-390. DOI C Limited
  3. Bourveau, T., Brochet, F., & Garel, A. (2022). The capital market consequences of tenure-based voting rights: Evidence from the Florange Act. Management Science, 68(12), 9107-9128. link B Moderate
  4. Ernstberger, J., Link, B., Stich, M., & Vogler, O. (2017). The real effects of mandatory quarterly reporting. The Accounting Review, 92(5), 33-60. link C Limited
  5. Harty, D. (2021, August 26). Silicon Valley's Long-Term Stock Exchange finally lists its first companies: Twilio and Asana. Fortune. link B Moderate
  6. Kraft, A., Vashishtha, R., & Venkatachalam, M. (2018). Frequent financial reporting and managerial myopia. The Accounting Review, 93(2), 249-275. link C Limited
  7. Pozen, R. C., Nallareddy, S., & Rajgopal, S. (2017). Impact of reporting frequency on UK public companies. CFA Institute Research Foundation. link C Limited

Every source for this factor is listed on the economic factor page.