Innovation, short-termism, and the cost of strong corporate governance

摘要

Research Summary Do the performance pressures of the capital market exacerbate short-termism and stifle innovation? This longstanding question has doggedly eluded a conclusive answer due to conflicting empirical findings. We revisit two studies that have been central to rejecting short-termism: Atanassov (2013) and its replication by Karpoff and Wittry (2018). After revising some of the empirical choices by Atanassov (2013), we find the opposite result: antitakeover laws that insulate managers from the market for corporate control enhance innovation, driven by firms with significant ownership by short-term oriented investors. However, antitakeover laws do exacerbate the pursuit of value-destroying acquisitions. Our findings highlight corporate governance as a strategic variable that imposes a tradeoff in disciplining different agency conflicts and weak governance as a necessary evil to stimulate innovation. Managerial Summary We present evidence that shareholder pressure indeed exacerbates short-termism and stifles innovation, especially in firms with significant ownership by short-term oriented investors. One key implication is that calls to reduce managerial entrenchment and hold managers more accountable to shareholders warrant careful consideration. While curbing other forms of agency conflict, such as managerial shirking and the pursuit of value-destroying acquisitions, such reforms can exacerbate the myopic focus on short-term profits and prevent long-term value creation. Our findings warn that it is misleading to look for universally "good" governance. There are multiple forms of agency conflict that require diametric prescriptions, and designing corporate governance should carefully consider the tradeoffs based on a firm's ownership structure and the need for innovation.