Bridge over ocean
29 October 2019 Issue Brief


Short-termism refers to an excessive focus on short-term results at the expense of long-term interests. Short-term performance pressures on investors can result in an excessive focus on their parts on quarterly earnings, with less attention paid to strategy, fundamentals and long-term value creation. Corporations too often respond to these pressures by reducing their expenditures on research and development and/or foregoing investment opportunities with positive long-term potential. These decisions can weigh against companies’ development of sustainable products or investment in measures that deliver operational efficiencies, develop their human capital, or effectively manage the social and environmental risks to their business.


Federal securities laws are said to be one cause of financial-market short termism by encouraging Wall Street’s quarterly earnings fixation. The regulations’ quarterly reporting requirements exacerbate the problem, the argument goes. Analysts predict quarterly earnings, and companies feel pressure to meet those predictions. 


Financial intermediaries have shown an increasing short-term outlook in recent years. There’s also an attendant tension with the owners of the money being managed, who often require a long-term investment view (a retirement fund, for example). As a result of this misalignment of interests between the two groups, significant losses for investors can arise. Transaction costs aggravate this problem: because a short-term outlook often drives high portfolio turnover, this can lead to high transaction costs, reducing returns to investors.

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