Long-term firm gains from short-term managerial focus: Myopia and voluntary disclosures

By Anil Arya, Ram Ramanan
Journal of Accounting and Economics | April 2024

Citation

Arya, Anil., Ramanan, Ram. Long-term firm gains from short-term managerial focus: Myopia and voluntary disclosures Journal of Accounting and Economics .

Journal of Accounting and Economics, 2024

Abstract

A CEO's short horizon and associated myopic actions are typically viewed as detrimental to the firm. In contrast, studying a voluntary disclosure model wherein capital market and product market strategic considerations are in play, we show that the CEO's myopic behavior can improve a firm's long-term value. In particular, the disclosures of a long horizon CEO are seen as being entirely focused on the firm's interests and thus as being exploitative of customers. A short-horizon CEO myopically focused on short-term stock price is less aligned with the firm and, consequently, her disclosures are more customer friendly. As a corollary, when no disclosure is forthcoming, customers are less skeptical that the myopic CEO is withholding information to exploit them. This improves customers' willingness to pay with a myopic CEO, leading to higher firm profitability. The paper also layers in compensation design to derive the optimal degree of managerial short-term focus to induce.

Ram Ramanan is an Associate Professor of Accounting at the Indian School of Business (ISB). Before joining ISB, he served as a faculty member at the University of California, Davis and at SUNY, Binghamton.

Professor Ramanan’s research focuses on the role of accounting in management decisions. Specifically, he examines the incentive effects of financial reports and disclosures on various managerial decisions both inside an organisation and within supply chains. His work has been published in leading academic journals, including The Accounting Review, Journal of Accounting and Economics, The Review of Accounting Studies, Contemporary Accounting Research, Management Science, and Production and Operations Management.

At ISB Professor Ramanan teaches the core Managerial Accounting course and the elective in Strategic Performance Management.

Professor Ramanan holds a PhD in Accounting from the Kellogg School of Management, Northwestern University, and an MBA from the Indian Institute of Management, Bangalore. He is also a Chartered Accountant.

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Ram Ramanan