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Speaking of the short-term: disclosure horizon and managerial myopia

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Abstract

We study conference calls as a voluntary disclosure channel and create a proxy for the time horizon that senior executives emphasize in their communications. We find that our measure of disclosure time horizon is associated with capital market pressures and executives’ short-term monetary incentives. Consistent with the language emphasized during conference calls partially capturing short-termism, we show that our proxy is associated with earnings and real activities management. Overall, the results show that the time horizon of conference call narratives can be informative about managers’ myopic behavior.

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Notes

  1. We mostly use the term “short-termism” but also occasionally refer to it as “myopia,” another commonly used word to describe excessive focus on the short term in the corporate world and capital markets.

  2. StreetEvents also includes full transcripts from conference presentations that are excluded from the population of conference call transcripts that we use.

  3. An electronic survey was sent to 170 business undergraduate and graduate students. The response rate was 47 %. Students were asked the following questions: “Rate the following words based on whether they refer to short or long time horizons for decision-making. Use your judgment.” We use a 1-to-5 Likert scale, with one referring to very short-term decisions and five to very long-term decisions. Students had the sixth option of responding “cannot say if the word refers to either the short- or long-term.” They were required to give an answer for all words in our dictionary and were given unlimited time to complete the survey, though the average response time was approximately 4 min.

  4. The word “quarter” is the keyword that appears with the highest frequency in the conference call transcripts and exhibits the highest score among all short-term keywords (i.e., is classified as the least short-term oriented). In robustness tests, we construct our proxy for short-termism excluding this keyword, and our results hold (untabulated test).

  5. Chuk et al (2013) document coverage biases in First Call. Specifically, they document that only 51 % of hand-collected earnings-forecast press releases are picked up by First Call. Furthermore, we obtain our guidance data by merging our sample with that of Brochet et al. (2011), who examine S&P 1500 firms. Hence our measure understates actual guidance issuance. While we cannot be sure how this coverage bias might influence our variable, it is conceivable that it helps capture short-termism (i.e., if firms that issue frequent forecasts are more likely to be picked up by First Call.) However, in untabulated tests, we find that our inferences remain unaffected if we limit our sample to S&P 1500 firms.

  6. Ideally, we would like to use executive pay duration measures as developed by Gopalan et al. (2014) or Edmans et al. (2014). However, those measures can only be constructed from 2006 onward, thereby excluding a large portion of our sample.

  7. When our dependent variable is performance-adjusted accruals, we use an OLS model. When our dependent variables are loss avoidance and small positive earnings surprises, we use probit models.

  8. We deflate with the total number of short- and long-term oriented keywords rather the total number of words in conference calls so that our proxy is not driven by company size (i.e., conference calls of larger companies are longer).

  9. Prior studies have explored the role of leadership and different managerial styles in influencing firms’ investment strategies (Bertrand and Schoar 2003). However, organizational inertia and path dependence are likely to limit managers’ effectiveness in determining or changing firms’ investment horizons (Liebowitz and Margolis 1995). To investigate the role of individual managers in inducing short-termism, we identify companies in our sample that experience a CEO turnover in 2002–2008, using data on corporate boards from the Corporate Library database. We choose CEOs as the unit of analysis because CEOs set the tone in an organization and are responsible for the overall performance of the company. We identify 12 instances of CEO turnover in our sample where the newly hired CEO also comes from a firm with complete earnings conference call disclosure data. We track the differences (distance) in the short-termism that these 12 pairs of companies exhibit before and after the CEO move. In untabulated results, we find that the correlation between the short-termism that a CEO’s past and current company exhibit significantly increases after the turnover (0.11 vs. 0.36 before and after CEO’s move). The average short-termism distance of past and current CEO’s employer is 0.28 before the turnover and 0.20 afterward. However, the difference of the means is not statistically significant (t-stat = 1.59), potentially due to the small number of observations.

  10. In untabulated analyses, we also test whether our short horizon proxy is associated with the probability of a firm being subject to an AAER. We find a significantly positive coefficient on Short Horizon, when the dependent variable is the probability of an AAER being released in the next year, after controlling for other determinants of short-termism. This lends incremental support to the idea that short-termism is associated with opportunism. We acknowledge, though, that this test is rudimentary and caution against inferring too much from this result alone.

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Acknowledgments

We are grateful to our editor Patricia Dechow for her guidance on how to improve the paper and to two anonymous reviewers for their very helpful comments. We thank Beth Blakenspoor (discussant), Mark Bradshaw, Brian Bushee, Jeremiah Green, Victoria Ivashina, Stephannie Larocque, Reuven Lehavy, Andrew Leone, Greg Miller, Krishna Palepu, Shiva Rajgopal, Cathy Schrand, Doug Skinner, Rodrigo Verdi, Franco Wong, and conference participants at the 2014 Review of Accounting Studies Conference, American Accounting Association Annual Meeting in Washington DC, the Financial Accounting and Reporting Section Mid-Year Meeting in San Diego CA, the Colorado Summer Accounting Research Conference, the DePaul University People & Money Research Symposium, the Harvard Business School Information, Markets and Organizations conference, the Temple University Accounting Conference, Wharton Accounting Seminar at the University of Pennsylvania, the 2013 Conference on Finance, Economics and Accounting at the University of Northern Carolina at Chapel Hill, and brownbag participants at Harvard Business School and the University of Southern California for their helpful comments. We are grateful for useful discussions with Catherine Abi-Habib, Conor Kehoe and Andrea Tricoli from Mc Kinsey & Company. We are grateful to David Solomon that shared his data on investor relations firms. James Zeitler provided excellent research assistance. George Serafeim acknowledges financial support from the Division of Faculty and Research Development of the Harvard Business School.

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Authors and Affiliations

  1. Boston University, Boston, MA, USA

    Francois Brochet

  2. University of Southern California, Los Angeles, CA, USA

    Maria Loumioti

  3. Harvard Business School, Boston, MA, USA

    George Serafeim

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  1. Francois Brochet
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  2. Maria Loumioti
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  3. George Serafeim
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Correspondence to Maria Loumioti.

Appendices

Appendix 1

See Table 10.

Table 10 List of words referring to time horizon
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Appendix 2

See Table 11.

Table 11 Variable definitions
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Brochet, F., Loumioti, M. & Serafeim, G. Speaking of the short-term: disclosure horizon and managerial myopia. Rev Account Stud 20, 1122–1163 (2015). https://doi.org/10.1007/s11142-015-9329-8

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