The effect of decision time horizon on short termism: An experimental approach

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Abstract

Short-termism (i.e., the sub-optimal favouring of short-term performance over long-term performance) is generally explained as an outcome of the agency relationship whereby self-interested managers and/or stock market pressures distort the balance between short and long-term performance. We investigate if short termism (Crilly, 2017; Reilly, Souder, & Ranucci, 2016) is due to cognitive bias (temporal distortion) rather than agency costs. We test these hypotheses with an experimental approach by applying a 3x2 factorial design to manipulate temporal distortion on 60 non-conflicted decision-makers. Results suggest that individuals make inconsistent investment decisions based on differing payout time horizons. Participants faced with simple comparisons between investment opportunities were consistent across different time periods and followed a model of rational decision-making. In contrast, more complex decisions led to intertemporal inconsistency. We provide evidence that: 1) individuals on the whole struggle to deal with incorporating time into business decisions in a consistent way causing us to question the link between short-termism and agency theory; 2) principals likely view investment decisions inconsistently across time and so are a cause of sub-optimal investment decision-making and 3) we need to look beyond studies of moral hazard associated with agency theory and/or myopic market pricing when investigating short-termism.

Keywords: Boards of Directors, Corporate Governance, Short-Termism, Board Process, Cognitive Bias

Authors’ individual contribution: Conceptualization — G.N.; Methodology — A.B.M.A.; Formal Analysis — A.B.M.A. and M.B.M.A.; Investigation — A.B.M.A. and M.B.M.A.; Resources — A.B.M.A. and M.B.M.A.; Data Curation — M.B.M.A.; Writing — Original Draft — G.N.; Writing — Review & Editing — G.N.; Visualization — A.B.M.A.; Supervision — A.B.M.A.; Project Administration — A.B.M.A.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: C91, D25, D81, D91, G34, M14

Received: 19.07.2021
Accepted: 29.10.2021
Published online: 02.11.2021

How to cite this paper: Alzoubi, A. B. M., Nicholson, G., & Alzoubi, M. B. M. (2021). The effect of decision time horizon on short termism: An experimental approach [Special issue]. Journal of Governance & Regulation, 10(4), 293–301. https://doi.org/10.22495/jgrv10i4siart9