Data Management

Making The Numbers? "Short Termism" & The Puzzle Of Only Occasional Disaster

Date Added: Aug 2010
Format: PDF

This paper presents a model that can reconcile these apparently contradictory perspectives. The author shows that if the source of long-term advantage is modeled as a stock of capability that accumulates gradually over time, a firm's proclivity to manage short-term earnings at the expense of long-term investment can have very different consequences depending on whether the firm's capability is close to a critical "Tipping threshold". When the firm operates above this threshold, managing earnings smoothes revenue with few long-term consequences. Below it, managing earnings can tip the firm into a vicious cycle of accelerating decline.