Making the Numbers? "Short Termism" & the Puzzle of Only Occasional Disaster

DSpace/Manakin Repository

Making the Numbers? "Short Termism" & the Puzzle of Only Occasional Disaster

Citable link to this page

 

 
Title: Making the Numbers? "Short Termism" & the Puzzle of Only Occasional Disaster
Author: Rahmandad, Hazhir; Repenning, Nelson P; Henderson, Rebecca M.

Note: Order does not necessarily reflect citation order of authors.

Citation: Rahmandad, Hazhir, Nelson P. Repenning, and Rebecca Henderson. "Making the Numbers? 'Short Termism' & the Puzzle of Only Occasional Disaster." Harvard Business School Working Paper, No. 15-027, October 2014.
Full Text & Related Files:
Abstract: Much recent work in strategy and popular discussion suggests that an excessive focus on “managing the numbers” ―delivering quarterly earnings at the expense of longer term investments―makes it difficult for firms to make the investments necessary to build competitive advantage. “Short termism” has been blamed for everything from the decline of the US automobile industry to the low penetration of techniques such as TQM and continuous improvement. Yet a vigorous tradition in the accounting literature establishes that firms routinely sacrifice long-term investment to manage earnings and are rewarded for doing so. This paper presents a model that reconciles these apparently contradictory perspectives. We show that if the source of long-term advantage is modeled as a stock of capability that accumulates over time, a firm’s proclivity to manage short-term earnings at the expense of long-term investment can have very different consequences depending on whether the firm’s capability is close to a critical “tipping threshold”. When the firm operates above this threshold, managing earnings smoothes revenue and cash flow with few long-term consequences. Below it, managing earnings can tip the firm into a vicious cycle of accelerating decline. Our results have important implications for understanding managerial incentives and the internal processes that create sustained advantage.
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:13350435
Downloads of this work:

Show full Dublin Core record

This item appears in the following Collection(s)

 
 

Search DASH


Advanced Search
 
 

Submitters