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The Chimera of Stock-Market Short-Termism

Hillary Clinton has made stopping corporate short-termism part of her platform, proposing to use the capital gains tax to encourage stockholders to hold onto their stock for a longer time. But the plan won’t work, in part because the problem of short-termism itself has been woefully exaggerated.

CAMBRIDGE – An often-heard refrain, increasingly voiced in US politics, is that corporate America is excessively influenced by short-term stock-market considerations. While the US presidential election is not particularly focused on policy at the moment, the campaign will soon end, at which point people will govern and policies will be adopted. Given that both Republicans and Democrats have criticized short-termism, it is possible that some of those policies might aim to address it. They are unlikely to make any difference.

Not only has the problem of short-termism been woefully exaggerated, but the policy proposals for addressing it are severely lacking. Consider Democratic presidential nominee Hillary Clinton’s proposal – which Vice President Joe Biden has endorsed – to use the capital gains tax to encourage shareowners to hold on to their stock for a longer time.

The idea is that when shareowners furiously trade their stock, corporate executives feel pressed to ensure high earnings every quarter, so that the share price does not fall. Investment in, say, research and development, despite its long-term benefits, can induce shareowners to sell, punishing the company with a declining stock price.