Is It Time to Get Rid of Earnings-per-Share?

Do U.S. companies focus too much on short-term profits at the expense of long-term investments, profits, and growth? There is considerable debate among academics, practitioners, and politicians about the relevance of short-termism, its possible sources, and potential mechanisms to mitigate it.

In a recent article, I propose that earnings-per-share (EPS) targets are a very likely driver of short-termism and discuss what we can do to break the link between EPS targets and short-termism. Earlier survey evidence shows that managers admit to short-termism driven by earnings management—they are willing to sacrifice positive net present value long-term investments to meet earnings goals.… Read more