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(originally published by Booz & Company)


How a Short-Term Strategy Can Backfire

The authors caution that although executives may bemoan the short-term focus of investors, they reinforce that mind-set. For example, when company leaders deliberately establish expectations for the next quarter’s earnings that they know they can beat by just a penny or two, they are trying to elicit a short-term bump or to duck sharp downturns in the stock price.

The authors also point out that managers may feel they have no choice. “Executive compensation is typically tied to current performance and stock prices,” they note, “incentivizing managers to overweight the short-term.”

Bottom Line:
Although firms and managers frequently focus on projects designed to deliver in the near future, the immediate results are often mixed and mask greater risk for the long term than other companies face. In addition, these firms attract a base of short-term investors, leading to higher stock-price volatility.

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