We often hear that corporate executives believe the pressure to issue quarterly figures and guidance leads to over-emphasis on short-term returns. A new paper by Vikas Agarwal (Georgia State University), Rahul Vashishtha (Duke University), and Mohan Venkatachalam (Duke University) provides some welcome focus on another source of short-term pressure, the reporting requirements imposed on mutual funds, which contributes to a vicious cycle of perpetual attention-deficit.
In Mutual Fund Transparency and Corporate Myopia (Review of Financial Studies, 2018, 31(5), pp. 1966-2003), we explore the role of mandated frequent disclosures of portfolio holdings by mutual fund managers in shaping their emphasis on short-term corporate performance and the concomitant myopic underinvestment in innovative activities by investee firms’ managers….This reluctance to ride-out short-term underperformance can get exacerbated when fund managers are required to make more frequent disclosures about their stock picks (Prat, 2005). The issue is that the short-term performance of a fund manager’s long-term bet becomes more visible to fund investors, who might see it as a bad bet if it’s losing money in the short term. Anticipating that type of behavior, fund managers just become more reluctant make those long-term bets. This increased short-term focus of fund managers can, in turn, create pressure on managers of investee firms to behave myopically.
Anecdotal evidence also offer support for the above arguments. The following quote from a money manager in Lakonishok et al. (1991) directly highlights how the intense pressure to show winning stocks in their quarterly portfolio disclosures can cause money managers to myopically ignore the future potential of some stocks:
“Nobody wants to be caught showing last quarter’s disasters. … You throw out the duds because you don’t want to have to apologize for and defend a stock’s presence to clients even though your investment judgment may be to hold.”