The puzzle of financial reporting and corporate short-termism: A universal ownership perspective

Abstract

This study considers the controversy surrounding financial reporting and corporate short-termism as a puzzle. The question remains as to why corporate managers and investors persist in exhibiting behaviours that trade off long-term value creation for meeting short-term financial targets. Using inter-temporal choice theory, we suggest that the myopia characterising decision-making is entirely rational, given the set of incentives faced. We view the puzzle through the prism of universal owners (pension and superannuation funds), arguing that the investment policies or 'mandates' implemented by these financial behemoths is the source of the myopic behaviour. The paper explores a range of policies that universal owners may consider implementing to ensure that the payoffs to corporate managers and investors are optimised through the pursuit of long-termism.