In boardrooms, courtrooms, and regulatory debates, corporate short-termism is often treated as a problem to be solved. Executives who focus too heavily on quarterly earnings, critics argue, sacrifice long-term value by cutting investment, skimping on innovation, and prioritizing optics over substance. But what if this widely accepted narrative is incomplete?
In competitive markets, short-termism does not operate in a vacuum. Firms are not only communicating with investors, they are also sending signals to rivals. And once competition enters the picture, the relationship between short-term focus and long-term value becomes more nuanced, and in some cases counterintuitive.
In a new paper, we offer a fresh perspective by examining how short-termism and competition interact to shape firms’ operational decisions and their long-run profitability. The central insight is that reducing the emphasis on immediate valuation does not necessarily reduce operational distortion. In some competitive environments, a degree of short-termism can improve long-term performance.
Operations as Signals, Not Just Decisions
Operational choices can provide public insights into a firm’s private information. When a firm builds capacity, expands production, or delays investment, these actions are visible not only to investors but also to competitors. Markets routinely interpret such decisions as signals. A large capacity expansion may suggest strong future demand; a restrained investment may signal caution or limited growth prospects. These inferences influence both stock prices and competitive behavior, creating a strategic tension. Firms would like investors to believe demand is high, boosting short-term valuation. At the same time, firms may prefer competitors to believe demand is weak, discouraging aggressive entry or expansion. The same operational decision, such as capacity expansion, speaks to both audiences at once.
Why the Combination of Short-Termism and Competition Matters
Short-termism changes how much weight executives place on near-term market valuation relative to long-term operating profit. An executive who cares deeply about stock prices may be willing to distort operational signals to convey favorable information, even if that distortion does not align with long-run efficiency. Much of the criticism of short-termism assumes firms operate in isolation. In those settings, managerial myopia tends to produce predictable outcomes: underinvestment, missed growth opportunities, and weaker long-term performance.
However, the role of short-termism is more nuanced in a competitive market. When rivals are watching closely, a company’s investments in capacity can serve as a strategic signal. By appearing more optimistic about demand, a firm may induce competitors to enter the market or expand aggressively. This increase in competitive pressure can, in some cases, outweigh the benefit of higher investment.
Our research formalizes this intuition in a model where firms privately know whether demand is strong or weak, while investors and competitors do not. Capacity investment serves as a signal of that private information. Depending on the firm’s short-term orientation and the market’s competitive intensity, firms adopt very different signaling strategies.
Distortion at Both Extremes
Operational distortion can arise not only when short-termism is high, but also when it is low. Here, “distortion” means deviating from the capacity level that would maximize long-term profit if no signaling concerns existed. We find that when short-termism is moderate in a competitive market, firms tend to invest efficiently. The firm’s conflicting incentives to send signals to investors and competitors roughly offset one another. When short-termism is very high, firms may distort investment to impress investors, even if that invites competition. When short-termism is very low, firms may still distort investment, often by underinvesting to avoid signaling strong demand to competitors. Thus, reducing short-termism does not eliminate distortion, but it can change its direction.
Short-Termism Can Improve Long-Term Profit
A positive level of short-termism can sometimes increase long-term profitability. By placing some weight on short-term valuation, firms may choose capacity levels that better balance investor signaling and competitive deterrence. The relationship is not monotonic. Too much short-termism can be harmful, but too little can also be costly. This framework helps reconcile why some empirical studies find that short-termism reduces investment and harms performance, while others find neutral or even positive effects. The impact depends on competitive structure and information asymmetry, not just management time horizons.
Implication for Law, Policy, and Governance
Short-termism remains a legitimate concern, but the solution is not simply to push firms toward ever-longer horizons. In competitive markets, firms must manage multiple audiences simultaneously. Prescriptions to constrain short-termism may be misguided. Disclosure rules, governance reforms, and compensation design all influence how firms signal information to both investors and rivals. Boards and regulators should recognize that operational decisions are strategic signals, not merely technical choices, and that some degree of short-term focus may play a constructive role in competitive markets. The challenge is not to eliminate short-termism, but to understand when it distorts value creation and when it may, paradoxically, protect it.
Amber Xiaoyan Liu is an assistant professor at Santa Clara University’s Leavey School of Business, and William Schmidt is an associate professor at Emory University’s Goizueta School of Business. This post is based on their recent article, “Operational Distortion: Compound Effects of Short-Termism and Competition,” available here.