CC BY
3
imported goods and the constraints which this dependence put on the Russians when economic sanctions are in the picture.
In conclusion, in a better time for the average Russian, when oil price was stable and rising, it would be much harder to convince Russia to steer to some different directions, but now it is high time the policy makers and businesses started to actively tackle the problem from its root and create a more healthy, well-balanced economy. Meanwhile, the oil industry needs not to fear its fate in new Russia with many highly competitive industries, as they will only serve as a firm back-up system for its growth, whereas the risks are minimized.
References:
1. Gylfason T. Lessons from the Dutch Disease: Causes, Treatment, and Cures. The Paradox of Plenty, 22 March 2001. Available on the internet: https://notendur.hi.is/gylfason/pdf/statoil22.pdf
2. Stiglitz J. We can now cure Dutch disease. Available on the internet: http://www.theguardian.com/business/2004/aug/18/comment.oilandpetrol
3. The Economist Explains: What Dutch disease is, and why it's bad. The Economist. Nov 5th 2014. Available on the internet: http://www.economist.com/blogs/economist-explains/2014/11/economist-explains-2
Poiskova A. V.
A student in 2d year of Master programme International Finance Faculty Financial university under the Government of the Russian Federation
Russia, Moscow
SHORT-TERMISM AND MANIPULATION OF FINANCIAL RESULTS: CAUSES, PROBLEMS, WAYS TO OVERCOME.
Annotation. The article explains short-termism phenomenon, analyses reasons for its origination, gives an overview of problems it creates, and suggests the means of its minimization.
Аннотация. В статье рассмотрено явление «шорт-термизм», проанализированы причины его возникновения, обозначен вызванный им круг проблем и предложены средства их минимизации.
The global financial crisis that started in 2007 drew attention to the concept of value creation and long-term investments as opposed to improvement of short-term earnings. This article describes the phenomenon and seeks for ways to overcome it.
Short-termism can be defined as the inclination of corporate managers to orient corporate strategies towards maximization of short-term earnings at the cost of long-term objectives [3].
But what makes managers behave in such a way? The main reason is the pressure of investors who require improvement of financial indicators in the short-
"Экономика и социум" №5(24) 2016
www.iupr.ru
41
term. Nowadays, in the world of new technologies and globalization, the issue becomes an emerging problem. Individual investors prefer to entrust their savings to investment funds, since today there is a huge load of information that can be properly and timely analyzed only by special means. which are possessed by financial institutions. But in return, individual investors require a visible growth of their wealth. They have an opportunity to compare the results of investment funds in the near future and change the allocation of their money transferring them to another fund with minimal transactional costs. That implies a rough competition between the financial institutions and influences their investment policy. Therefore, investment funds tend to finance not the companies with promising sustainable future growth, but the companies that are likely to improve their financial results in the near future. The next level of short-termism pressure is the influence exerted by shareholders on top-managers. There are three factors. The first one is the reelection period of an executive director which, for example, in the UK equals to one year that motivates managers not to work towards maximizing shareholders' value in a long-run, but towards attaining the results that would satisfy shareholders expectations in the short-term. Secondly, since hostile takeovers and managerial dismissals are common, executives try to avoid low current stock valuations and respond to investors' explicit demands in order to prevent them. The third factor is a remuneration scheme that is a driver for actions and decisions of executives. If executives' bonuses depend on achieving some short-term goals, such as an increase in the market capitalization or annual revenue growth, they have incentives to pay more attention to these performance indicators at the cost of longer-term value creation [5]. Moreover, if an executive owns stock options with short vesting periods, he/she is more likely stimulate actions to accelerate the growth of the company in the short-run to benefit from selling their holdings before the long-term costs of their decisions materialize.
One of the illustrations of short-termism would be that management of companies uses high discount rates while evaluating investment projects. In 2011, Andrew Haldane and Richard Davies found out that among UK and US listed firms, "cash-flows 5 years ahead are discounted at rates more appropriate 8 or more years hence; 10 year ahead cash-flows are valued as if 16 or more years ahead; and cash-flows more than 30 years ahead are scarcely valued at all."[2] That is why short-term investments are made more often regardless the fact that long-term ones could be more benefit for companies.
So, the major problem short-termism creates is underinvestment. Investments require immediate outflow of capital followed by some payback period after the end of which a project will gain profits for a company. But at the moment of investment there is a drop in financial statements showing cash outflow that directly influences business valuation. At the same time, there is no confidence in the success of a project. Several US companies issue quarterly earnings guidance that influences executives to make decisions in favor of short-term performance. In 2004, US National Bereau of Economic Research conducted a survey among financial executives showing that in order to meet the earnings
target, 80% of respondents would cut spending on R&D, advertising and maintenance, 55% would delay starting a new project and 41% would turn down a positive NPV project altogether [1].
The ROI requirements now placed on both private and public companies are inconsistent with the long intervals usually needed to develop value-adding innovations in industries such as electronics and pharmaceuticals. While it could still be argued that stock-market valuations are more accurate than any alternatives, these markets are primarily a device for valuing existing assets and re-trading entitlements to their returns. Capital for new investment is raised only when companies make initial public offerings or issue new bonds or shares. Even in this instance, some of the funds raised, represent a value transfer from new (public) to existing (private) investors, which may be followed by value extraction as earlier loans are repaid and shareholdings cashed-in[4].
Underinvestment is also considered with human capital. Short-termism is an obstacle for a company to train its employees and attract new specialists. To reduce short-term costs and increase stock price, companies announce significant layoffs, which affect long-term performance detrimentally.
In my opinion, it is impossible to overcome short-termism problem completely. But there is a number of ways to minimize its pressure on executives. The first one is communication of the long-term goals and strategies and the ways of their implementation. Since executive appointment is limited to a short-time period, it is necessary to be able to provide the results of the work not only through profit, capitalization, and positive trend in CF criteria, but also by undertaking well-evaluated investment projects and development of sustainable growth in a company. These topics can be communicated via annual reports and different meetings. Annual reports should be formed in a way to establish a focus on the achievement of long-term value increase. Also, stakeholders should work on improvement of incentive plans for executives, so that they would be motivated to make decisions that would influence the future of a company in the best way, for example, the vesting periods should be long.
Taking into consideration individual investors, restrictions should be imposed to improve effectiveness of investment funds, especially those ones that have to provide a return in long-term (pension schemes). The retention can also be raised by increasing transactions costs. The same measures can be applied to institutional investors, which might be supplemented by implementing a rule by which long-term investor may have more voting rights, etc.
Short-termism not only influences some individual companies; it restricts a sustainable growth of the whole economy. Therefore, the measures stated in the article should be applied to maximize effectiveness of business management, investments decisions and shareholders' wealth.
Reference list.
1. Alison Atherton, James Lewis and Roel Plant. Causes of Short-termism in the Finance Sector. Discussion Paper (final). Institute for Sustainable Futures, University of Technology Sydney.2007.
2. Andrew Haldane and Richard Davies (2011). The Short Long. Speech delivered at the 29th Société Universitaire Européene de Recherches Financières Colloquium, Brussels. www.bis.org/review/r110511e.pdf
3. Jaakko Aspara, Kalle Pajunen, Henrikki Tikkanen, and Risto Tainio. Explaining corporate short-termism: selfreinforcing processes and biases among investors, the media and corporate managers. Cambridge journals. SocioEconomic Review. 2014. №12, 667-693
4. Mariana Mazzucato and Alan Shipman. Accounting for productive investment and value creation Industrial and Corporate Change. 2014. Volume 23. Number 4. pp. 1059-1085
5. Malcolm S, Salter. How Short-Termism Invites Corruption... And What to Do About It. Working Paper // Harvard Business School. 2012. No 12-094.
Polkin A.S.
Master student, Bachelor of Economics Financial University under the Government of Russian Federation
Tutor: Kazakova A. V. Moscow, Russia INTEREST RATE RISK HEDGING: PROS AND CONS One of the ways to manage and prevent interest rate risks is hedging. Insuring possible losses is assessed as a reliable safeguard against poor decisions, which exceeds the responsibility for the choice of an optimum strategy. The primary aim of hedging along with protecting from unfriendly environment of the dynamics of the interest rate is profiting when the dynamics of the interest rate have a positive spin.
Traditionally we classify hedging according to scale - micro-hedging (hedging of profits in accordance with specific requirements and obligations) and macro-hedging (hedging of aggregate profit or net interest yields). The first type of hedging is employed to protect profit received from key operations. The second type of hedging is used as a supplementary instrument for overcoming the lag that exists in the management of the assets' and liabilities' management based on the GAP method.
Interest rate risk hedging may be structural or may be conducted with the help of market instruments (pic.1)
"Экономика и социум" №5(24) 2016
www.iupr.ru
44
