Discuss the statement “Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long term profits."      

Expert Answers
thanatassa eNotes educator| Certified Educator

The issue of what is sometimes called "short-termism" or a focus on quarterly statements has become increasingly central to questions about the purpose of corporations and the ways that executives are compensated. Especially for firms that require technological innovation or are platform based, short term profitability can be an enemy of long term growth.

Platform companies such as Facebook, Amazon, Uber, and Twitter benefit from network effects. The more members they have, the more attractive they become to potential customers, leading to a virtuous growth cycle. As high prices or cost cutting measures can impede growth, many such companies can go for several years without showing a profit, but instead aim at increasing market share. Measures such as stock buy-backs, dividends, and increasing profitability by charging for services or increasing profit margins might harm such companies, while investing in R&D or logistics can help their long term growth, but may lower stock prices or earnings.

One major issue in executive compensation is that it is often tied to stock options, giving executives an incentive to increase stock value by mergers and acquisition or balance sheet manipulation rather than investing the money in R&D or quality improvement that will sustain their companies over the long term.