Phelps on Short-Sightedness
By David Henderson
Executives avoid farsighted projects, no matter how promising, out of a concern that lower short-term profits will cause share prices to drop.
If that were true, we could not explain the behavior of oil companies or drug companies. Both could raise their short-term profits by cutting their spending on discovery (oil) and R&D (drugs) to zero. They haven’t done that. Why? Precisely because they care about share prices and share prices reflect the market’s expectation of the present value of the future stream of net income.
HT to John Garen.