Video: Nobel laureates visited Swedish House of Finance

Dec. 13, 2016

Why be short termist, if the long term consequences of that strategy is priced into the market? And are corporate raiders good for shareholders? Those were two of the issues discussed when Nobel laureates Oliver Hart and Bengt Holmström visited Swedish House of Finance.

The Nobel laureates of the 2016 Swedish Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, professor Oliver Hart from Harvard University and professor Bengt Holmström from MIT, visited Swedish House of Finance on December 9. Together with moderator Per Strömberg from Swedish House of Finance, Chairman of the Prize Committee, they discussed contract theory and corporate finance from different perspectives.

One of the questions posed was whether the academic view on corporate raiders has been too positive. Professor Oliver Hart answered that he has indeed changed his mind on this issue.

“Previously we were very much into the agency view that raiders were great, and that they were the only thing that could save shareholders from bad management. We were concerned that it wasn’t easy enough to have a raid, and that raiders wouldn’t have enough profit”, he stated.

“But now I have a somewhat different view”, he continued. “The pursuit of profit is perhaps not the only thing. Sometimes a company is taking a broader approach, and the shareholders approve of it. And yet it could be vulnerable to a raid. Even though the shareholders want the company to be environmentally friendly, somebody could make money from turning it into a dirty company.”

"Why be short termist?"
The discussion continued to cover long termism versus short termism, and the view that owners neglect the long term.
“I’ve never been impressed by that argument”, said Oliver Hart. “I don’t see why shareholder should focus on the short term. The market should price things according to the long view. Why would you choose to be short termist if that’s going to destroy value?”

“Because the fund managers are short term, that’s the problem”, answered professor Bengt Holmström.
“I think this business of fund managers putting pressure is a real serious problem”, he stated, continuing:

“It’s ironic, if you look at the big picture. It’s the pension money that’s chasing the fund managers, the fund managers are chasing the CEOs, the CEOs are chasing the employees and it’s the employees’ money that funds all this. The circle is closed and the people don’t realize that they are chasing their own tail.”

If we were living in a little village, we would notice that something is wrong, concluded Bengt Holmström:
“But this isn’t a little village, it’s a big village and only a few of us realize that something is wrong.”