At the helm of most companies, top management teams are responsible for enhancing shareholder wealth. Any deviation from this objective squarely falls under their purview. Yet, these teams frequently need more time to deviate from standard business conventions to achieve short-term earnings goals. A common tactic involves myopic marketing spending—curtailing funds allocated to marketing, research, and development efforts to inflate short-term earnings, detrimentally affecting long-term company performance.
Groundbreaking research from the University of Notre Dame has unveiled an innovative approach that empowers investors to anticipate instances of myopic marketing spending up to a year before they occur. This foresight allows for the strategic adjustment of investment portfolios and holds the potential for significantly improved financial returns, sparking a new era of informed decision-making.
A collaborative survey conducted by Focusing Capital on the Long Term and McKinsey involving 500 global executives revealed a pervasive trend among top management teams: the compulsion to achieve immediate earnings targets often at the sacrifice of pursuing long-term strategic objectives. This short-sighted decision-making is particularly prevalent in scenarios leading up to significant financial activities such as capital increases, initial public offerings, and before critical executive retirements.
McKinsey’s findings indicate a troubling trend: top management teams are willing to reduce investments critical for long-term growth by an average of 17 per cent when faced with a 15 per cent revenue shortfall. This propensity for short-termism disadvantages key stakeholders, including investors, customers, and board members. It is also linked to poorer stock market performance over time, manifesting in market share erosion and innovation delays, painting a grim picture of the consequences of myopic marketing spending.
Traditionally, investors have been able to identify myopic spending practices only retrospectively by analyzing publicly available financial statements. However, a forthcoming study titled “Can Words Speak Louder than Actions? Using Top Management Teams’ Language to Predict Myopic Marketing Spending,” to be published in the Journal of Marketing, proposes a predictive model that promises significant benefits over traditional methods, heralding a new era of proactive decision-making.
Lead author Andre Martin, assistant professor of marketing at Notre Dame’s Mendoza College of Business, and Tarun Kushwaha from the University of Wisconsin have pioneered this approach by examining the language used by management teams during earnings calls. By focusing specifically on the emphasis placed on marketing and earnings, their research predicts future myopic marketing spending. Analyzing 11 million sentences from nearly 25,000 quarterly earnings call transcripts across 1,197 companies from 2008 to 2019 demonstrates that this method can foresee such spending every quarter, up to a year in advance.
Drawing on his background as a former software engineer and program manager for Xerox and SRC Inc., Martin highlights the predictive power of analyzing management discourse. The study found that an increase in earnings emphasis is correlated with a substantial rise in the likelihood of myopic marketing spending in the future.
Furthermore, the research juxtaposed the financial outcomes of companies engaging in myopic marketing spending against those that abstained, revealing that avoiding investment in the former could result in an additional 6.44 per cent return over four years, equating to an annual abnormal return of 1.61 per cent above existing prediction methods.
Beyond financial implications, Martin underscores the significance of their findings regarding governance. The study equips boards of directors with an early warning system to detect executive actions that could detrimentally impact long-term company value, facilitating timely intervention.
Additionally, this predictive tool empowers individual investors with deeper insights into executive strategies and intentions. It offers stakeholders, regulatory bodies, and competitors a clearer understanding of potential management actions that could influence not just the long-term value of the company but the broader market landscape. By lowering the informational barriers surrounding executive decisions, this approach enhances monitoring capabilities through the early identification of myopic practices.
More information: Andre Martin et al, EXPRESS: Can Words Speak Louder than Actions? Using Top Management Teams’ Language to Predict Myopic Marketing Spending, Journal of Marketing. DOI: 10.1177/00222429241244804
Journal information: Journal of Marketing Provided by University of Notre Dame