Tunyi, Abongeh A and Areneke, Geofry and Hussain, Tanveer and Agyemang, Jacob (2024) From performance to horizon: managements’ horizon and firms’ investment efficiency. Review of Accounting and Finance, 23 (3). pp. 419-446. DOI https://doi.org/10.1108/raf-11-2022-0319
Tunyi, Abongeh A and Areneke, Geofry and Hussain, Tanveer and Agyemang, Jacob (2024) From performance to horizon: managements’ horizon and firms’ investment efficiency. Review of Accounting and Finance, 23 (3). pp. 419-446. DOI https://doi.org/10.1108/raf-11-2022-0319
Tunyi, Abongeh A and Areneke, Geofry and Hussain, Tanveer and Agyemang, Jacob (2024) From performance to horizon: managements’ horizon and firms’ investment efficiency. Review of Accounting and Finance, 23 (3). pp. 419-446. DOI https://doi.org/10.1108/raf-11-2022-0319
Abstract
Purpose: This study proposes a novel measure for management’s horizon (short-termism or myopia vs long-termism or hyperopia) derived from easily obtainable firm-level accounting and stock market performance data. The authors use the measure to explore the impact of managements’ horizon on firms’ investment efficiency. Design/methodology/approach: The authors rely on two commonly used but uncorrelated measures of management performance: accounting performance (return on capital employed, ROCE) and stock market performance (average abnormal return, AAR). The authors combine these measures to develop a multidimensional framework for performance, which classifies firms into four groups: efficient (high accounting and high market performance), poor (low accounting and low market performance), myopic (high accounting and low market performance) and hyperopic (low accounting and high market performance). The authors validate this framework and deploy it to explore the relationship between horizon and firms’ investment efficiency. Findings: In validation tests, the authors show that management myopia (hyperopia) explains firms’ decision to cut (grow) research and development investments. Further, as expected, myopic (hyperopic) firms are associated with significantly more (less) accrual and real earnings management. The empirical tests on the link between horizon and investment efficiency suggest that myopic managers cut new investments while their hyperopic counterparts grow the same. Ultimately, the authors find that myopia (hyperopia) exacerbates(mitigates) the over-investment of free cash flow problem. Originality/value: The authors introduce a framework for assessing management’s horizon using easily obtainable measures of performance. The framework explains inconsistencies in prior empirical research using different measures of performance (accounting versus market). The authors demonstrate its utility by showing that the measure explains decisions around research and development investment, earnings management and firm investments.
Item Type: | Article |
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Uncontrolled Keywords: | Firm performance, Management horizon, Myopia, Hyperopia, Investment efficiency, Cartesian plane |
Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Essex Business School |
SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
Depositing User: | Unnamed user with email elements@essex.ac.uk |
Date Deposited: | 29 Apr 2024 15:45 |
Last Modified: | 30 Oct 2024 21:21 |
URI: | http://repository.essex.ac.uk/id/eprint/38201 |
Available files
Filename: Management_horizon_and_investment_efficiency.pdf