11 Myopic Management

Question 1

Bedeutung

Corporate Myopia

Answer 1

Managers focusing on short-term goals overemphasize strategies with immediate payoffs at expense of strategies with superior but more distant payoffs (long-term)

Question 2

Two approaches for inflating short-term earnings

Answer 2

1. Accounting-based earnings management (accurals management)
2. Myopic management (manipulation of real activities)

Question 3

Bedeutung & Examples

Accounting-based earnings management

Answer 3

Altering discretionary accruals to influence reported earnings

Examples: Recognition of revenues, capitalizing vs. expensing, delaying, write-offs, …

Question 4

Bedeutung & Examples

Myopic management

Answer 4

Altering operational practices to meet short-term goals

Examples: Cutting R&D and advertising/marketing budgets, reducing employy training, ..

Question 5

How to recognize potentially myopic firms?

Answer 5

Short-term: Stock returns rise in period just after myopic behavior

Long-term: Soon after this boost, stock returns drop and even reach a level lower than before myopic behavior

Also: Abrupt changes in strategy or operations might indicate myopia or repairing of it

Question 6

What is a possible mediator of myopic behavior?

Answer 6

e.g. meeting earnings benchmarks, high importance of current stock price and current earnings

Question 7

Bedeutung

Innovation ratchet strategy

Answer 7

Public firms influence their firm valuations by timing new product introductions strategically (mostly Q2 and Q4)

Problem: It is at expense of product market revenues because of lower sales growth, also the level of innovations drop (less break-through innovations)

Question 8

Name 2 situations for Myopia

Answer 8

1. Retirement of top executives (reducing R&D the year before)
2. Issuing new equity (cut marketing spending before issuing SEO)

But: Depending on investor type (institutional/monitoring investors are less likely to cut R&D to reverse earnings decline)

Question 9

3 ways to combat against Myopic Management

Answer 9

1. Long-term focus (including long-term focus in executive compensation packages or base them on non-financial performance measures)
2. Disclosure of information (reduce information asymmetry so stock market can easire recognize myopia & develop measures for non-financial performance indicators)
3. Investor loyalty (engage investor relations to attract shareholders investing for long-term view - e.g. loyalty dividend)

Question 10

Literature Mizik - Theory and Practice of Myopic Management

Content and main focus?

Answer 10

1. Reviews theory and empirical evidence of myopic management
2. Financial consequences of myopic management
3. Myopia has a long-term net negative impact on firm value
4. Shareholders, managers and marketing researchers play a role in limiting myopic management practices