Consequences of Incorrect Job Order Costing
Causes of Failure of Job Order Costing: The following is the list of the most probable causes that would cause the job order costing system of the company to fail: Adequate System Not In Place: Job order costing requires an elaborate system in place. In earlier times this was done with the help of paperwork […]
Why do Investors Hold Fixed Income Securities?
The bond market is much larger in size as compared to the equity markets of the world. This is because a large portion of the bonds sold in the market is sovereign debt. For more than two centuries, various countries have been routinely turning to the bond market in order to borrow money. With the […]
Convertible Notes and Startup Funding
Startup firms usually receive their funding in the form of debt or equity. Some newer ways of providing funding to the startups, which are different from both debt and equity, are still being explored. However, there are many creative ways of funding startups within the debt-equity realm as well. One of these ways is called […]
Impact of the Fall of Silicon Valley Bank
The Silicon Valley Bank collapse has the potential to be a turning point in the way the modern financial system functions. It is being touted as an event that is likely to have large-scale repercussions on the entire financial system. It is alleged that the Silicon Valley Bank is definitely going to have an impact […]
Pros and Cons of Convertible Notes
In the previous article, we studied what convertible notes are and how they are used in the context of financing a startup firm. The various terms and conditions which are generally a part of the convertible notes agreement were also explained along with the working of the note. However, before investors and founders make a […]
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 90s and early 2000’s, 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.
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.
Quarterly results have been a mere enabling factor in this trend. The following factors also played a significant role.
The success and failure of any CEO are known by the quarterly results that they produce. Hence to maintain the illusion of their success intact, CEO’s tend to focus a lot more on short term results than they otherwise would.
Better results might accrue over the long run. However, the management might have changed till then. It, therefore, makes no sense for the executives to devise and follow through with long term plans.
With the advent of quarterly capitalism, innovation has been outsourced to startups or private companies in Silicon Valley. The larger corporations are no longer at the forefront of the technological revolution.
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 company’s stock price and the promoter’s 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.
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An Overview of Contracts and Why They are Important to Business and Society
February 12, 2025
