On business short-termism: the case of CVS’s discontinuing tobacco sales
| Published date | 09 July 2018 |
| DOI | https://doi.org/10.1108/JEPP-D-18-00001 |
| Pages | 161-165 |
| Date | 09 July 2018 |
| Author | Chase Gooding,E. Frank Stephenson |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
On business short-termism:
the case of CVS’s discontinuing
tobacco sales
Chase Gooding
Berry College, Mount Berry, Georgia, USA, and
E. Frank Stephenson
Department of Economics, Berry College, Mount Berry, Georgia, USA
Abstract
Purpose –The purpose of this paper is to examine the effect of CVS’s decision to stop tobacco sales on the
company’s share price.
Design/methodology/approach –The paper uses event study methodology to examine the same day
effect of CVS’s announcement and the one-year later effect of CVS’s announcement. Competing pharmacy
retail chains’stock performance is included for comparison purposes.
Findings –CVS’s shares fell by about one percentage point on the day of the company’sannouncement while
competitors’share prices increased. A year later, however, CVS’s share price had increased by about twice as
much as competitors’share prices.
Originality/value –The finding that a company can make a decision that harms its short-run share price in
exchange for a long-run share appreciation suggests that short-termism may not be as significant a concern
as some critics of corporate management suggest.
Keywords Event study, Short-termism, CVS
Paper type Research paper
Introduction
A common critique of businesses, particularly publicly traded companies whose stock prices
receive much attention, is that they are too focused on short run performance rather than the
long-term well-being of the companies. Known as “short-termism,”CEOs and other executives
are characterized as being too concerned about quarterly profits rather than a sustainable return
to shareholders. Of course, the potential for short termism is not unique to corporate executives.
Politicians worried about winning their next election may alter their behavior to enhance their
electoral chances (Garri, 2010; McCannon, 2013; Bandyopadhyay and McCannon, 2014).
Short-termism is sometimes attributed to the increased use of stock options for executive
compensation and has been blamed for practices such as earnings manipulation. Indeed, there
is evidence that corporate executives feel some pressure for favorable short-term performance
(Grinyer et al., 1998; Liljeblom and Vaihekoski, 2009). The pressure apparently varies by
country; Segelod (2000) finds that US executives perceive more pressure for short term stock
performance than their Swedish counterparts. A firm’s ownership can mitigate or exacerbate
short-termism; Dill et al. (2016) find that foreign ownership increases the emphasis on short
term profits, while Brunzell et al. (2015) determine that large private equity ownership stakes
reduce short-term performance pressure. Managers may also play a role –Brunzell et al. (2015)
find young managers feel more short-term performance pressure and Palley (1997) posits that
managerial turnover contributes to short-termism. To date, however, most short-termism
research deals with managerial perceptions rather than company behavior, though Miles’
(1993) finding that “discount rates implicit in market valuations applied to cash flows which
accrue in the longer term are too high”and Demirag’s (1996) report that short-term financial
pressure is associated with reduced R&D spending and patenting rates are notable exceptions.
This paper examines a recent corporate decision –the US pharmacy retail chain CVS’s
2014 decision to discontinue sales of tobacco products. Using event study methodology,
Journal of Entrepreneurship and
Public Policy
Vol. 7 No. 2, 2018
pp. 161-165
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-D-18-00001
Received 2 January 2018
Revised 5 February 2018
Accepted 14 February 2018
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
161
On business
short-termism
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