Explaining Sacrifice of Long-Term Investments for Short-Term Earnings: Spiral of Silence in Financial Markets

Abstract

Despite the increasingly observed tendency of company managers to sacrifice long-term value-maximizing investments to meet short-term earnings forecasts and the ostensible pressure by financial market in encouraging this tendency, earlier research has lacked a systemic perspective to the emergence of the pressure and its effects. Based on the spiral of silence theory, the authors provide a theoretical system-level explanation to the emergence of the pressure in the financial market and its effects on company managers. It is proposed that a dynamic, systemlevel, self-reinforcing process among the investing public may lead to a status quo in which the orientation of a minority of (institutional) investors and investment analysts towards short-term earnings, vociferously expressed in media and certain stock price and analyst reactions, is biasedly perceived as the orientation of the majority. This will further make company managers orient themselves excessively for the short-term – even if the silent majority of investors currently and/or inherently had quite long-term earnings/investment orientation.