The tyranny of quarterly capitalism

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Hillary Clinton has a plan "to transform Wall Street," said Andrew Ross Sorkin at The New York Times. In a recent speech, the presidential candidate lambasted what she called "quarterly capitalism," suggesting executives are too obsessed with quarterly earnings reports and with boosting their share prices in the short term. The result, she says, is billions of dollars spent on stock buybacks and shareholder dividends — money that should be devoted to new hires or to long-term investments that would benefit the economy. She vowed that, if elected, she would rewrite the tax code on capital gains so that wealthy investors would pay ordinary income tax on the sale of investments — 39.6 percent, instead of 20 percent — for stock they've owned for less than two years, in order to discourage "cut-and-run shareholders."

"The lament over quarterly capitalism" didn't start with Clinton, said Neil King Jr. at The Wall Street Journal. In 2011, McKinsey & Co. managing director Dominic Barton blamed short-term corporate thinking for the 2008 financial crisis. Last year, BlackRock CEO Laurence Fink pleaded for "a focus on the longer term" in an open letter to hundreds of the biggest American companies. Some firms, like Unilever and Etsy, have stopped offering quarterly earnings targets and revenue projections altogether. Today's corporate incentives are "hopelessly biased toward boosting the short-term share price," said Edward Luce at the Financial Times. You can see it plainly in firms' behavior: Companies are making healthy profits, yet investing in expansion at the lowest level since 1947.

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"There's more than a little economic confusion, and arrogance, in this critique," said Robert Robb at the Arizona Republic. Whether profits are more productively invested by a company's executives or by its shareholders is unknowable. "The odds, however, favor the shareholders," who can invest money from buybacks and dividends in an infinite number of ways. The last thing Washington needs to do is interfere with how private capital is allocated. Even if you think quarterly capitalism is a problem, tinkering with tax rates won't solve it, said Mark Zandi at the New York Daily News. Clinton's plan to impose a higher capital gains tax on investments won't affect the large institutional investors that dominate the markets, or dissuade activist investors from going after a quick buck.

Whatever the merits of Clinton's plan, the ritual of quarterly earnings produces nonsensical results, said Suzanne McGee at The Guardian (U.K.). Only in the "bizarre world of earnings season" can Apple report a 38 percent gain in profitability and still be dubbed a "disappointment" because it failed to beat analysts' even higher expectations. "But that's exactly what happened" last month; in a day, traders wiped $60 billion off Apple's value, despite soaring sales and profits. It's no wonder then that companies jockey endlessly with analysts to get earnings estimates they'll have no trouble beating. "We don't have to wait for Clinton or any other politico" to tell us this is nonsense. "Corporate earnings news does matter, but the noise that surrounds it rarely does."