The Pitfalls of Quarterly Capitalism
Creating the maximum possible shareholder value had always been the cornerstone of capitalism. All economic theories had always been aimed at maximizing long term shareholder value. However, in the late 90’s and early 2000s, this situation changed rapidly. Instead of reporting annually, companies had to report their profits or losses on a quarterly basis. It is believed that such a reporting would provide the shareholders with more up to date information and enable better decision making. However, there were also side-effects to this phenomenon of quarterly reporting. The biggest side effect was the beginning of what is colloquially called as quarterly capitalism. In this article, we will understand what quarterly capitalism means and what its effects are.
The Meaning of Quarterly Capitalism
Quarterly capitalism refers to policies created with a short time frame in mind. The name is derived from the fact that most executives are unwilling to take decisions that hurt the company in the short run but benefit it in the long run. Hillary Clinton once famously mentioned in her speech that most executives believed that markets and activist shareholder groups would negatively affect them if they pursued policies that prioritized long term interests over quarterly benefits! This should send alarm bells ringing for any value investor who thinks and buys long term.
Factors That Led To the Rise of Quarterly Capitalism
Quarterly results have been a mere enabling factor in this trend. The following factors also played a significant role.
Effects of the Rise of Quarterly Capitalism
An Alternate Solution: Semi-Annual Reporting
One possible solution to this problem is if the stock exchanges mandate that companies declare their results semi-annually instead of quarterly. This will help organizations maintain a slightly longer term focus and avoid some of the pitfalls mentioned in this article. However, the response is expected to be varied. Tech companies from Silicon Valley are unlikely to accept this mandate and so are other companies that are in the middle of a bull run. When a company is doing well, it needs every opportunity to broadcast its performance. Such public announcements have a positive effect on the companys stock price and the promoters net worth. Mature companies like utility companies are likely to accept this mandate. Their reports are likely to be similar regardless of whether they are published quarterly or annually.
To sum it up, quarterly capitalism has started a culture wherein companies have to be short sighted! Far sightedness and strategic thinking are penalized in this bizarre culture.
- Fundamental Principles of Accounting
- Cash vs. Accrual Basis of Accounting
- What is Single Entry System
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.