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

38 Pages Posted: 20 Sep 2010 Last revised: 23 Mar 2022

See all articles by Nelson Repenning

Nelson Repenning

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Rebecca M. Henderson

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: September 2010

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 can reconcile these apparently contradictory perspectives. We show that if the source of long-term advantage is modeled as a stock of capability that accumulates gradually 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 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 lead to sustained advantage.

Suggested Citation

Repenning, Nelson P. and Henderson, Rebecca M., Making the Numbers? "Short Termism" & the Puzzle of Only Occasional Disaster (September 2010). NBER Working Paper No. w16367, Available at SSRN: https://ssrn.com/abstract=1678910

Nelson P. Repenning (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-258-6889 (Phone)
617-258-7579 (Fax)

HOME PAGE: http://web.mit.edu/nelsonr/www/

Rebecca M. Henderson

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-543
Cambridge, MA 02142
United States
617-253-6618 (Phone)
617-253-2660 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
24
Abstract Views
566
PlumX Metrics