Does the Capital Market Punish Managerial Myopia?

Tong, J. and Zhang, F.F. (2014) Does the Capital Market Punish Managerial Myopia? FIRN Research Paper .

Abstract

The extant literature provides conflicting arguments on whether the capital market punishes managers’ myopic behavior. Stein (1988, 1989) argues that the capital market is myopic and will push managers to behave myopically. In contrast, Jensen (1988) believes that the capital market is efficient and will punish managerial myopia. However, empirical studies on how the stock market reacts to managerial myopia are scarce. This study aims to fill in this gap by examining how the capital market reacts to managerial myopia. Using managers’ cutting R&D to meet short-term earnings goals as a research setting, this study reveals that the capital market actually penalizes managerial myopia, especially for firms with high investor sophistication. Our results are consistent with Jensen’s (1988) contention that the security market is not shortsighted. Additionally, we document that compensation, especially cash compensation, could be one of the reasons why managers behave myopically.

Publication Type:	Journal Article
Murdoch Affiliation:	School of Management and Governance
Publisher:	Financial Research Network
Copyright:	The Authors
Publishers Website:	http://www.firn.org.au/
URI:	http://researchrepository.murdoch.edu.au/id/eprint/22202

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