McKinsey Global Institutes’ research provides a quantitative overview of the struggle between long- and short-termism at the company level. They use a data set of 615 large- and mid-cap United States (US) publicly listed companies from 2001-2015 to compare investment, growth, earnings quality, and earnings management, and how the two schools of thought compare on a relative basis.

The general trend shows an increasingly short-term mindset over this time, despite the slight reversion away from short-termism in the years directly preceding the global financial crisis. This sentiment was mostly driven by increased fixed asset investment and strong earnings growth.

Since then, short-termism has resumed and has largely progressed. Previous research has illustrated that profits have migrated towards idea-intensive industries (short-term investments) from capital- and labour-intensive industries (long-term investments). It seems plausible that in some industries a growing profit pool encourages long-termism, while adverse economic conditions may drive short-termism as investors grow increasingly worried about short-term viability.

Long-term companies, on a revenue basis, significantly outperformed other companies by 47% on average. Furthermore, their superior fundamentals were a big driver of the success and were demonstrated through less volatility with the standard deviations of their revenues (5.6% compared to 7.6% for other firms). Moreover, long-term companies delivered higher levels of economic profit (81%), which is a more direct way to assess the total value created by a company. Not only did these long-term companies provide more value, this value gap widened over time as strategic-term plans came to fruition.

Long-term firms’ superiority in revenue, earnings, and economic profit translated into a higher market capitalisation, adding $7 billion more in market capitalisation on average than other firms between 2001 and 2014. The findings also suggest that if all other firms had appreciated at the same rate as long-term firms, total US market capitalisation could have increased by 4%, due to the success in the public equity markets. Furthermore, long-term companies (representing just 27% of the sample) captured a disproportionate 44% of the growth in total returns to shareholders.

Long-term companies invested significantly more in research and development (R&D) (50% greater on average) than other companies over 14 years. This trend was more pronounced during the financial crisis, long term companies grew at an annualised rate of 8.5%, whereas other companies grew at 3.7%. To contextualise this, long-term companies invested in future growth when others failed to do so, and they were rewarded for it.

Over the entirety of the sample period there was an evident disparity in economic output and growth contribution, long-term entities creating nearly 12,000 more jobs on average than other companies. Based on the report findings, had all firms taken a long-term orientation, it would have boosted gross domestic product (GDP) by 0.8% per year on average. Extrapolating off this, assuming rates of job creation for long-term companies observed continue over the next decade, this would trigger a $2.7 trillion (in 2015 dollars) in additional GDP growth.

1. From 2001-2014 the earnings of long-term firms grew 36% more on average than those of other firms, further exhibiting strong fundamentals.
2. Long-term company total return to shareholders were superior, with a 50% greater likelihood that they would be top decile of top quartile by 2014. Despite taking bigger hits to their market capitalisation during the financial crisis than other firms, their share prices recovered more quickly after the crisis.
3. If all US publicly listed firms created as many jobs as the long-term firms, the US economy would have added more than 5 million additional jobs over this period.
4. 87% of executives and directors feel most pressured to demonstrate strong financial performance within 2 years or less.
5. 65% of executives and directors say short-term pressure has increased over the past 5 years.
6. 55% of executives and directors at companies without a strong long-term culture say their company would delay a new project to hit quarterly targets even if it sacrificed some value.
7. If all other firms had appreciated at the same rate as long-term firms, US public equity markets could have added more than $1 trillion in incremental asset value from 2001 to 2014. This forgone value would have been sufficient to eliminate a substantial portion of the total funding gap among US public pensions that are among the largest shareholders of these companies.
8. Within the industry groups that delivered above-average shareholder returns during this 14-year period, long-term companies captured an even greater share of the total returns (47%) while representing an even smaller percentage of the sample (26%). Even in the industries with below-average shareholder returns, long-term companies captured a greater percentage of the total returns than would be expected given their share of the sample.
9. Delivering consistent and higher revenue growth suggests that a company is maintaining consistent and sustainable sources of growth, which are key goals of long-term planning.