An Identity Theory of the Short- and Long-Term Investor Debate

The debate as to whether staggered boards are value-reducing has been quite active, with strong arguments made for “yes,” “no” and “sometimes.” The argument that they are value-reducing has, it seems fair to say, its origins in a more basic belief that managers may be apt to entrench themselves, and that yearly election of directors is an important counterweight or preventive step. Given the extent to which much of corporate law scholarship has been focused on the ever-present specter of managerial agency costs, the “yes” position had seemed like the default, the position to be rebutted, until the last few years, when a prominent “no” finding came to be followed by more “yes,” “no” and “sometimes” findings. At this juncture, extremely sophisticated empirical work squares off against other extremely sophisticated work, and the debate continues. Maybe the data will never confess—the issue is simply “too” difficult. But another possibility is that prior beliefs, including, most importantly, those about the extent to which managerial agency costs are in need of constraint, affect the debate, making the threshold for resolution—a data “confession” that must be accepted—impossibly high.

This article, prepared for a symposium issue on Investor Time Horizons held at the Seattle University School of Law’s Adolf A. Berle, Jr. Center on Corporations, Law & Society, argues that conflicting prior beliefs underlie, influence, and ultimately frustrate various debates concerning investor time horizons. The opposing camps in the debates are: those favoring corporate management versus those favoring shareholder activists; those believing that corporations are best run for the exclusive benefit of shareholders versus those believing that other stakeholders’ interests should also be taken into account; and those arguing that favoring the short term contemplates different actions than favoring the long term versus those arguing that the two time horizons should and do dictate the same actions.

Each side provides evidence for its position, but somehow, the other side is not convinced. The questions at issue are complex, such that definitive evidence is not readily forthcoming. But it is not just that finding (enough or the right kind of) evidence is hard. It is that evidence is not sufficient to convince people (and in some cases may even not be necessary). Not that evidence is irrelevant, of course, or that it does not have considerable influence. But it does not have nearly as much influence as it is supposed to have. People’s own positions necessarily go beyond what the evidence definitively shows. But staying agnostic is generally not tenable—law and policy have to be made, after all, and, from a cognitive perspective, not having working assumptions as to many matters is quite costly. What fills the gap? Identity—a sense of self, of who and what “sort” of a person we are. And an important part of our identity is the beliefs we hold. People have sufficient stake in their beliefs that abandoning them, even in the face of considerable “evidence,” is often not straightforward. This phenomenon, of course, extends far beyond the context of investor time horizons—it is pervasive.

The beliefs that are relevant for the three debates include some that are ostensibly about facts, and some that are ostensibly about values. The former category includes beliefs as to the extent to which a) managers would take advantage but for constraints, b) companies are less profitable when interests other than shareholders’ are taken into account and c) markets really are (semi-strong) efficient. What would definitive evidence as to these propositions look like—evidence that would convince those who started off agnostic or skeptical? Relevant beliefs about values include whether corporations have obligations to stakeholders other than shareholders, which themselves may turn on beliefs as to whether those stakeholders’ interests are legitimate, and how able those stakeholders are to advance their interests without corporate solicitousness. How to argue to resolution as to these positions is also not clear.

What follows from this? A plea to complement empirical, as well as theoretical, work on specific phenomena with empirical and theoretical work on the underlying beliefs involved, and how those beliefs affect how research is done, presented, and received.

The complete article is available here.