Managers should not focus on the current stock value because doing so will lead to overemphasis on short-term profits at the expense of long-term profits.
The financial market is a sensitive and continually changing operation of the economy and it’s within this market that companies are trying to sustain long term profitability. According to Byrd, Hickman & McPherson (2013), “manager’s must consider the size of a project’s expected cash flows, their timing, the riskiness of these cash flows and the returns available to shareholders on alternative investments as they assess value I n pursuit of stockholder wealth maximization” (p. 17). Therefore, what is meant by provided statement is that there are many factors to consider when making short-term and long-term investments.
Managers cannot use current stock value as the sole indicator of the stock’s performance, because the current value only provides the present value. Doing so can lead to an over inflation or expectation of short-term profits as the value can be high today and drastically drop the next. For example, in October of 1987, also known as Black Monday the financial market’s average dropped 25% from 2,246 to 1,738, erasing $1 trillion from the value of U.S. stock (Bogle, 2008). Management’s decision to focus on current value has the potential to be profitable in the short-term, however overemphasizing that the value to lead to short-term profits not being as beneficial as expected and eventually lead to long-term losses due to the market drastically changing over time. Therefore, managers should take current stock value into consideration however, its sole focus should not be placed on current value because it can lead to overemphasis on short term profits and no consideration on how it will affect the long-term profit. An example of how short-term can be detrimental for the long term can be seen through the financial balance sheet. For instance, is the retention of residual cash flows, firms can use this money to either pay claimants (stockholders, debt, suppliers) or reinvest. If a corporation focuses on current stock value, they could potentially decide to reinvest that revenue. If it does not pay out then the business is left trying to pay its stockholders or bills from other sources affecting its bottom line.
In my opinion a company cannot focus on one or the other and needs to focus on both short-term and long-term goals. My reasoning for this is that, while short-term goals are usually on the basis of what a firm wants to achieve within a year or less, however the short-term results can have a lasting effect. Therefore, I believe that when considering and implementing short-term goals, a business should always take some consideration on how any resulting consequences can have on the long-term.
Bogle, J.C. (2008). Black Monday and Black Swans. Financial Analysts Journal, 64(2), 30-40. https://doi-org.proxy-library.ashford.edu/10.2469/faj.v64.n2.9Links to an external site.
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version]. Retrieved from https://content.ashford.edu/Links to an external site.
Mangers should not focus on the current stock value because it might lead to an overemphasis on short-term profits at the expense of long-term profits. I do not believe that this statement can be applied to every situation.
Managers, which are the employees of the stockholders, are in place to maximize the wealth of the business owners. According to Byrd et al., (2013), it refers to them as residual claimants in that they have claim to the funds that are left over after all the other bills are paid. Managers should not focus on the current stock value, however I believe that they should be concerned with profits. When managers become too focused on the short term stock price and inconsistencies they will either fail or invest current yields into future quarters which can lead to an over distribution of investment resources to short term gains at the liability of longer term needs.
It can take some time for some investments to reflect. While trying to accommodate short-term gains, it can generate for financial allocations that could be appropriately applied in other areas that could help in the long-term. A manager making a decision too soon could lead to detrimental consequences for the company. All managers should be involved with the longevity of the company and its ability to grow and succeed. Managers that are focused on the long term profitability will balance the current needs with the extended need for assets. Their job is to focus on the long term variable disposition of the company and assure that investment dollars are accessible to make adjustments in the fixed costs or sunk cost resources in the company.
Short-term goals lead to short-term gains which are usually short lived. “Short-term is defined as a period in which at least one of the inputs is fixed, the long term is a period of sufficient duration that all inputs are variable and subject to change” (Miller, 2012). However, a manager that is not focused on short-term can also create problems in the long-term. In the short-term, if there is not an adequate amount of investments it can prevent the business from being able to succeed in the long-term. There needs to be some sort of balance and relation between both long and short-term.
I believe that short-term businesses attract short-term investors which can lead to higher risk. Whether the business has exceptional short-term quarterly results will not affect the risk from short-term investors. The greatest financial reward that a business can obtain and deliver are long-term profits.
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version]. Retrieved from https://content.ashford.edu/ (Links to an external site.)
Miller, R.L. (2012). Economics today (17th ed.). Saddle River, NJ: Pearson Education Inc