A Fresh Look at Stock Market Short‐termism
| Published date | 01 September 2014 |
| Date | 01 September 2014 |
| Author | Edward Walker‐Arnott,Marc T. Moore |
| DOI | http://doi.org/10.1111/j.1467-6478.2014.00676.x |
JOURNAL OF LAW AND SOCIETY
VOLUME 41, NUMBER 3, SEPTEMBER 2014
ISSN: 0263-323X, pp. 416±45
A Fresh Look at Stock Market Short-termism
Marc T. Moore* and Edward Walker-Arnott**
In this article, we develop a novel understanding of stock market short-
termism as a social phenomenon. Contrary to formerly popular
academic belief, short-termism is a problem that is highly unlikely to
be structurally self-correcting. An important driver of short-termism
typically elided within st andard legal-academic a nalyses is the
informational centricity of modern stock marke ts, and resulting
pressure on corporate managers to generate fresh `news' indicative
of perceived business `progress'. We highlight the growing enthusiasm
of policy-makers for a discriminatory `two-tiered' approach to public
company investor relations. Accordingly, long-term and committed
investors are expected to be brought into the company's governance
`inner circle', while other investors are implicitly relegated to lower-
tier `outsider' status. We argue that this supports a discriminatory
approach to the allocation of voting entitlements in newly listing
companies, enabling committed investors to develop cooperative and
sustained governance relations with management unencumbered by
`outside' stock market pressures for short-term financial-performance
outcomes.
INTRODUCTION
A frequently asserted cause of the United Kingdom's ailing industrial
performance over recent decades is the alleged `disease' of stock market
416
*Murray Edwards College, New Hall, University of Cambridge, Cambridge
CB3 0DF, England
mtm48@cam.ac.uk
** Faculty of Laws, University College London, Bentham House, Endsleigh
Gardens, London WC1H 0EG, England
Edward.Walker-Arnott@hsf.com
The former author is grateful to the Leverhulme Trust for funding part of the work
involved in the preparation of this article.
ß2014 The Author. Journal of Law and Society ß2014 Cardiff University Law School
short-termism.
1
It has for a long time been claimed that equity (or `stock')
market disciplines are prone to exert excessive pressure on public company
managers to generate immediate financial returns for shareholders, to the
detriment of long-term business investment and strategic planning.
2
In the 1990s this criticism was expanded by many commentators to the
wider Anglo-American context, and it became somewhat fashionable within
academic circles to advocate the development of a more `patient' form of
corporate capitalism in the United Kingdom and United States, adopting the
then-successful `blockholder' governance systems of Germany and Japan as
a general blueprint for reform.
3
On the other hand, a comparably populous
body of law and finance scholars ± exhibiting a dogmatic devotion to the
efficient capital markets hypothesis ± sought to deny that short-termism was
a significant problem, or even that such a phenomenon could properly be
said to exist at all.
4
The ideological fault lines of this debate have since become somewhat
blurred, with some leading former proponents of the efficient markets
position taking a notably more critical or moderate stance on the matter.
5
Meanwhile, more recent social-scientific analyses of stock markets in both
the United Kingdom and the United States have in general tended to focus
less on broad ideological and comparative arguments about corporate financ-
ing and governance systems, and ± correspondingly ± more on examining the
specific empirical mechanics of how corporate share ownership chains
actually function today.
6
This has vastly improved the general level of
academic awareness about what short-termism entails, enabling a broader and
more nuanced understanding of the concept to be developed.
417
1 See, for example, K. Williams, J. Williams, and D. Thomas, Why are the British Bad
at Manufacturing? (1983) chs. 5±6; W. Hutton, The State We're In (1996) ch. 6.
2 See J.M. Keynes, The General Theory of Employment, Interest and Money (1936)
ch. 6.
3 Hutton, op. cit., n. 1, ch. 12; J. Kay and A. Silberston, Corporate Governance (1995)
84; G. Kelly, D. Kelly, and A. Gamble (eds.), Stakeholder Capitalism (1997).
4 See P. Marsh, Short-Termism on Trial (1993); M.C. Jensen, `Some Anomalous
Evidence Regarding Market Efficiency' (1978) 6 J. of Financial Economics 95; E.F.
Fama, `Efficient Capital Markets: A Review of Theory and Empirical Work' (1970)
25 J. of Finance 383; R.J. Gilson and R.H. Kraakman, `The Mechanisms of Market
Efficiency' (1984) 70 Virginia Law Rev. 549.
5 See M.C. Jensen, `Agency Costs of Overvalued Equity' (2005) 34 Financial
Management 5; R.J. Gilson and R.H. Kraakman, `The Mechanisms of Market
Efficiency Twenty Years Later: The Hindsight Bias' in After Enron, eds. J. Armour
and J.A. McCahery (2006) ch. 1.
6 See J. Froud, S. Johal, A. Leaver, and K. Williams, Financialization and Strategy:
Narrative and Numbers (2006 ); P. Ireland, `Financializat ion and Corporate
Governance' (2009) 60 Northern Ireland Legal Q. 15; T. Golding, The City: Inside
the Great Expectation Machine (2002) ch. 6; L.L. Dallas, `Short-Termism, the
Financial Crisis, and Corporate Governance' (2012) 37 J. of Corporation Law 264;
L.A. Stout, `Are Stock Markets Costly Casinos? Disagreement, Market Failure, and
Securities Regulation' (1995) 81 Virginia Law Rev. 611.
ß2014 The Author. Journal of Law and Society ß2014 Cardiff University Law School
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