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Short-Term Talk, Long-Term Cost

The idea that financial markets are too focused on the short term has gained considerable ground within much of the news media and among some academics in recent years, and now it is attracting political attention in the US. It is not difficult to see why; but it is important to understand why that could end badly.

CAMBRIDGE – The idea that financial markets are too focused on the short term is gaining ground in the media and among academics. And now it is attracting political attention in the United States.

Investors’ obsession with short-term returns, according to the new conventional wisdom, compels corporate boards of directors and managers to seek impressive quarterly earnings at the expense of strong long-term investments. Research and development suffers, as does long-term investment in plant and equipment. Similarly, short-term thinking leads major companies to buy back their stock, thereby sapping them of the cash they need for future investments.

None of this is good news for the economy – at least, it wouldn’t be, if it were real. Upon closer inspection, the supposed negative consequences of investor short-termism appear not to be happening at all.

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