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Is Stock-Market Short-Termism Really Behind Climate Change?

It has become uncontroversial to suggest that corporate executives are obsessed with immediate profits, often at the expense of their company's long-term value. But the claim lacks evidence, misdiagnoses the problem, and comes with high costs of its own.

CAMBRIDGE – Today’s equity-market volatility and declining stock indices could prompt worried policymakers on both sides of the Atlantic to turn their attention to corporate managers’ obsession with the share price of their firms.

Stock-market short-termism has long been thought to induce two big problems, which are often mixed together. First, many assume that stock markets pressure corporations to focus too much on quarterly earnings to the detriment of their customers, their employees, and the environment. Their short-term operations harm those around them; economies and societies suffer.

Second, stock-market short-termism is widely perceived to induce corporations to shortchange themselves. Because they use their cash to buy back their own stock, it is assumed that they invest less in new factories and do less research and development, which they will need to remain competitive in the future. If the stock market induces firms to sharply cut such investments, the broader economy suffers.