The Theory and Practice of Myopic Management

Abstract

We review the theory and empirical evidence of myopic management as it pertains to marketing practice. We document empirically the stock market’s inability to properly value marketing and innovation activity in the face of potential for myopic management. We assess the total financial consequences of myopic management (the practice of cutting marketing and R&D spending to inflate earnings) and find that myopia has long-term net negative impact on firm value. We contrast myopic management with accounting accruals-based earnings inflation and show that the real activities (i.e., myopic management), and not the accounting numbers manipulation, have the greater negative impact on future financial performance. These results are consistent across alternative abnormal return measures and alternative benchmarks we use. We discuss the role shareholders, managers, and marketing researchers can play in limiting myopic management practices.

Keywords: myopic management, real earnings management, accruals-based earnings management