APPLIED ECONOMICS LETTERS

2021, VOL. 28, NO. 2, 148–152

https://doi.org/10.1080/13504851.2020.1739608

ARTICLE

Institutional ownership and marketing myopic management

Chanil Booa and Changhyun Kimb
a
Department of Economics and Business, Lehman College, CUNY, USA; bStrategy and Entrepreneurship Department, China Europe
International Business School, Pudong, China

ABSTRACT KEYWORDS
While marketing literature highlights both short- and long-term detrimental effects of marketing R&D; marketing; managerial
myopic management on firm performance, understanding of its antecedents is rather limited. This myopia
paper aims to determine if a certain level of transient institutional investor ownership influences a firm’s JEL CLASSIFICATION
marketing as well as research and development (R&D) investment decisions. Drawing on agency M31; D21
theory, the effects of institutional investor are examined using a two-stage panel logit regression
with instrument variables (IV). Empirical results show that a strong presence of short-term institutional
investors leads to the practice of marketing myopic management. The transient institutional investors
encourage managers to invest less in marketing and R&D as an effort to artificially inflate current-term
performance. We propose some policy suggestions that might be used to reduce the practice of
myopic management.

I. Introduction by which managers are more likely to introduce

A firm’s cash flow streams fluctuate as a result of
managerial decisions for a various number of alter-
native choices that can be undertaken to the value
of the firm (Porter 1992; Bohl, Ehrmann, and
Wellenreuther 2019). Unhinged tendencies in any
of these choices often lead to a long-term under-
performance in both product and financial markets.
Marketing and R&D functions are often affected by
such choices by managers (Chakravarty and Grewal
2011; Cozzarin 2016; Bahar 2019; Jiang et al. 2019).
This is because marketing activities with the purpose
of enhancing customer loyalty, brand awareness,
and customer equity have a long-term rather
a short term payoff structure (Mizik and Jacobson
2003). This nature of marketing and R&D invest-
ment can incentivize managers to sugarcoat current-
term performance, at the expense of long-term
shareholder wealth, by manipulating marketing
and/or R&D investments (Mizik and Jacobson
2007; Jiang et al. 2019). Research has suggested that
underspending on R&D and/or marketing or repla-
cing strategies that generate an immediate sales
increase is typical evidence of myopic marketing
management (Mizik 2010).
Although extant marketing research has investi-
gated managerial myopia, owner’s characteristics
myopic practice have received relatively little atten-
tion (Mizik 2010). In addition, studies in marketing
have treated investors as a homogenous entity,
without considering heterogeneity within institu-
tional investors such as varying degree of temporal
orientation, short-term vs. long-term (Jiang, Mo,
and Nie 2018; Ikizlerli 2019; Koo and Kim 2019;
Lee, Lu, and Wang 2019; Lei, Chen, and Liang
2019; Ma 2019; Nakatani 2019; Qiao and Li
2019). This paper hypothesizes that myopic mar-
keting management may be driven by the strong
presence of institutional investors who are very
sensitive to short-term earnings performance.
While long-term investors follow a buy-and-hold
strategy, short-term investors seek immediate pay-
offs, putting pressure on managers. For example,
with a strong presence of transient institutional
investors whose quarterly portfolio turnover is
very high due to a high sensitivity to quarterly
firm earnings releases, managers need to show
improved financial performance every quarter.
II. Literature review and hypothesis
Institutional investors may differ in their invest-
ment strategies, and this can have a significant

CONTACT Chanil Boo chanil.boo@lehman.cuny.edu Economics and Business Department, Lehman College, CUNY, USA
© 2020 Informa UK Limited, trading as Taylor & Francis Group

effect on firm managers’ decisions regarding mar-
keting investments (David, Hitt, and Gimeno 2001;
Jiang, Mo, and Nie 2018; Oiao and Li 2019). To
address to the heterogeneity within institutional
investors, Bushee (1998) categorizes institutional
investors into three groups. Dedicated institutions
often take larger stakes in a few number of firms at
a time with low quarterly turnover ratio, providing
long-term support for their own portfolio. On the
other hand, transient institutional investors own
relatively small holdings in diverse firms with
high quarterly turnover to maximize short-term
return on assets. The third group of investors are
quasi–indexers who generally chase the portfolio
composition of broader stock indices such as the
S&P 500.
Increasingly, institutions investors are committed
to frequent shuffling of their portfolios and to short-
term holding strategies, rather than to longer-term
holding to increase the wealth of their clients (Bushee
1998; Ikizlerli 2019; Ma 2019). They tend to favour
a short-term perspective that is more likely to max-
imize near-term returns and to reduce long-term
investments. If a firm has a higher portion of transi-
ent institutional investors in its ownership structure,
then managers may be able to more effectively exploit
their informational advantage to sugarcoat the cur-
rent-term performance. For example, institutional
investors with high turnover portfolios leave man-
agers undisciplined in merger or acquisition decisions
with a purpose of delivering a constituent growth sign
(Gaspar, Massa, and Matos 2005). Transient institu-
tional investors can squeeze management to sacrifice
long-term economic value through the threat of
divestment (Gillan and Starks 2000) or activist
actions (David, Hitt, and Gimeno 2001; Ikizlerli
2019). Under certain degrees of information asym-
metry, a strong presence of transient institutional
investors may result in managerial myopic actions,
leading to long-term firm value destructions.
Therefore, it is likely that managers will spend
less in long-term value-generating projects, such as
marketing, as marketing efforts often require consid-
erable time to deliver financial returns (Chakravarty
and Grewal 2011; Goedhuys and Sleuwaegen
1
Following Mizik (2010), we estimate fixed-effects autoregressive panel data forecast models of marketing and R&D myopia. We control for firm-specific effect, the
time specific effect, and the industry-specific effect. Both marketing and R&D series exhibit a significant persistence: The first-order own lags are 0.415 (p < .01) and
0.294 (p < .01), respectively. Neither series has unit roots. The forecast errors are used to classify firms into high-, marketing- and R&D myopia groups.
APPLIED ECONOMICS LETTERS 149
2016; Walters and Ramiah 2016; Kacprzyk and
Świeczewska 2019; Nam and Hanna 2019).
H1: Firms with higher ownership by transient institu-
tional investors are more likely to engage in the practice
of myopic management by inflating current-term earn-
ings and by cutting marketing (R&D) investment.
III. Data, measures, and methodology
Data
To investigate these issues, we begin with data for all
U.S. listed manufacturers in the COMPUSTAT for
the 2000–2010 period. We focus on manufacturers
because we require data from industries in which
both marketing and R&D play strategically significant
role and demand sufficient resources. Then, we merge
the data with institutional investor ownership from
Brian Bushee’s website, and stock related data from
CRSP. The final sample consists of 528 single business
unit firms and 3,345 firm-year observations.
Measures
To assess the potential degree of myopic manage-
ment, we follow Chakravarty and Grewal (2011)
and Mizik (2010). Primarily, we use advertising
(R&D) investment scaled by total assets as
a measure of marketing (R&D) investment. In addi-
tion, we use the return on operating assets (ROA) as
the measure of current-term earnings. We use unan-
ticipated changes in marketing and R&D budgets and
ROA as dependent variables. This unanticipated
component refers to the portion of the yearly market-
ing or R&D expenditures unexplained by prior period
marketing expenditures.1 We define high levels of
myopia as negative unanticipated yearly changes in
both marketing and R&D budgets. Similarly,
a negative unanticipated change in marketing
(R&D) budgets only represents a marketing (R&D)
myopia (Chakravarty and Grewal 2011; Mizik 2010).
Then we focus on firms that simultaneously report
unanticipated positive current-term earnings (ROA)
and unanticipated negative changes in marketing and
R&D investments. These are the firms that might be
150 C. BOO AND C. KIM

cutting their marketing and R&D budgets in an effort Where Myopiai,t is a binary variable that equals to 1 if
to inflate current-term earnings. firm i in time t is engaged in one of three types of
To determine the proportion of transient investor myopic practice (high-, marketing-, or R&D myopia);
ownership, we follow Bushee (1998). Specifically, we Transienti,t-1 is the proportion of transient institu-
use the composite measure of following three com- tional investor ownership in firm i in time t-1;
ponents: portfolio diversification, portfolio turn- CFi,t-1 is the cash flow; Individuali,t-1, Insideri,t-1,
over, and trading sensitivity. Transient institutional Sizei,t-1, Leveragei,t-1, and HHI i,t-1 are control vari-
investors have diversified portfolios, a high portfolio ables as described above.
turnover, and high trading sensitivity. Then we mea-
sure the percentage of transient investor ownership
for all firm-year observations as a ratio between the IV. Results and discussion
number of shares transient institutional investors Results
own and the total number of outstanding shares.
We use several control variables in our analysis. Table 1 displays the results of our two-stage panel logit
The cash flows of a previous period may determine regression with instrument variables. We estimated
current-term financial constraints and therefore, the three types of myopic practice (high-, marketing-,
marketing and R&D budget allocation (Chakravarty or R&D myopia) in three separate equations. As
and Grewal 2011), so we control for cash flows at time a result, the coefficients included in Table 1 are the
t-1. Following Bushee (1998), we control for the pre- odds of a firm being categorized as one of three
sence of individual institutional investors with at least myopic behaviours. For example, the probability of
5% stock ownership. Similarly, we control for insider high myopia increases by a factor of 1.028 per 1%
ownership. In addition, we control for firm size (the change in transient institutional investor ownership.
log of sales), leverage (the ratio of total debt and total Similarly, a higher proportion of transient investors
asset), and industry concentration (the Hirschman– has a significantly positive impact on both marketing-
Herfindahl index). and R&D myopia (β1.MKT = .035, β1.R&D = .044). The
probability of a firm engaging in marketing (R&D)
myopia increases by a factor of 1.035 (1.044) as a result
Methods of a 1% increase in transient institutional ownership.
The Table 1 results are consistent with the assertion
To explore the relationship between institutional
that managers engage in myopia management when
investors and managerial myopia in marketing/
they face a high pressure from large transient institu-
R&D, we use a two-stage panel logit regression
tional ownerships, by sacrificing long-term value crea-
with instrument variables (IV) as institutional
tion to meet short-term goals. Specifically, firms try to
investors and investment decisions are almost cer-
reap the benefits of higher current-term earnings by
tainly endogenous. As an instrument variable for
underinvesting in both marketing and R&D.2
transient institutional ownership, we use average
industry short-term institutional investor owner-
Table 1. Transient institutional investors and marketing/R&D
ship because it is correlated with the transient
investments.
institutional ownership variables and uncorrelated High Marketing R&D
with the error terms. The Wald F statistic supports Myopia Myopia Myopia
the validity of using the instrument variable. Transient Institutional .028*** .035*** .044***
Investors


logit Myopiai;t ¼ αi þ β1  Transienti;t1 Control Variables
Cash Flow −.071 .048 −.035
þ β2  CFi;t1 þ β3  Individuali;t1 Individual Ownership −.021*** −.017*** −.011***
Insider Ownership −.001 −.009 −.006
þ β4  Insideri;t1 þ β5 Firm Size −.201*** −.176*** −.477***
 Sizei;t1 þ β6  Leveragei;t1 Leverage .324 .580 .651
Industry Concentration −.361*** −.523*** −.427***
þ β7  HHIi;t1 þ ε Note: *** p < .01, ** p < .05, * p < .10.

2
We extended that data and conducted an analysis as a robustness check. We find that our results remain similar in a period of 2011–2017. We thank an
anonymous reviewer for this suggestion.

Discussion
Our analysis answers to the call for more studies
on myopic marketing management as described in
Mizik and Jacobson (2007). The authors argue
that marketing myopia is likely to be taking
place in many other situations while studying
managerial behaviour at the time of a seasoned
equity offering. The long-term negative conse-
quences of myopic practice outweigh the short-
term benefits. However, managers can enjoy the
gains if they are evaluated based on current-term
results or when they believe that they would be
able to move on when the negative impacts are
finally realized (Borghesi and Chang 2019; Hsu
and Chen 2019). Therefore, the overall attitudes
to and preventive practices towards myopic deci-
sions need to be changed because a quick and
simple fix appears to be unlikely. A zero or activ-
ity-based budgeting approach rather than incre-
mental budgeting would be effective as these will
require managers to justify related activities and
to emphasize its importance in their budgets
(Bong, Park, and Park 2019; Zhang and Xie
2020; Kim and Kim 2020). Designing managers’
compensation package in a way that puts more
weight on a firm’s long-term performance would
be useful as well. In addition, it is our view that
either voluntary information disclosure or corpo-
rate governance policies can also be used to facil-
itate transparency. Finally, marketing research
should be able to offer better developed screening
mechanisms to identify managerial myopic beha-
viour when it arises. Adjusting marketing invest-
ment can be the optimal strategy in order for
a firm to survive the changing market conditions.
Determining such optimal responses from the
myopic strategies may be difficult, but the efforts
to build such metrics will help investors as well as
managers themselves.
Acknowledgments
The authors acknowledge the valuable comments and feed-
back of the associate editor and two anonymous reviewers.
Disclosure statement
No potential conflict of interest was reported by the authors.
APPLIED ECONOMICS LETTERS 151
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