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Master Thesis
Does market competitiveness influence the potential relationship of temporal orientation and firms’ performance?
MSc. In Business Administration – International Management Track
Student: Agne Kazlauskaite
Student Number: 11083816
Supervisor: Robert Kleinknecht
Second Supervisor: Ilir Haxhi
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Statement of Originality
This document is written by Agne Kazlauskaite who declares to take full responsibility for the
contents of this document.
I declare that the text and the work presented in this document is original and that no sources
other than those mentioned in the text and its references have been used in creating it.
The faculty of Economics and Business is responsible solely for the supervision of completion of
3 Abstract
Corporate short termism has been identified and largely discussed in the literature as a
detrimental source of declining business performance in the long term. Yet, operating in current
markets requires rapid adaptation and reaction to changing market conditions and
competitiveness. Thus, companies might be forced to focus on current operations rather than
long term capabilities in order to remain in business. This paper investigates a potential positive
effect of short termism and introduces a novel mixed-method research approach including
content and regression analyses in order to test whether temporal orientation has an effect on
company performance taking into account market competitiveness as potential moderator.
However, the content analysis based on corporate calls transcripts determining managerial
temporal orientation and regression results using two different performance indicators reveal no
positive or negative effect on company performance in the long run. Moreover, market
competitiveness does not have any effect on the relationship either. The result of this research
gives an insight for an alternative explanation contradicting the existing literature, that short
termism may be the only option for businesses in order to remain and compete in the markets
largely affected by innovative disruptions, thus requiring further investigation.
4 Table of Contents 1. Introduction ... 5 2. Literature review ... 8 2.1 Temporal Orientation ... 8 2.2 Short Termism ... 11
2.2.1 Financial Markets Pressures ... 12
2.2.2 Managerial and Individual Incentives ... 13
2.2.3 Market Characteristics ... 14
2.3Firm’s Performance and Growth... 16
2.4 Market Competitiveness ... 16
3. Data and Method ... 18
4.1 Independent Variable and Content Analysis ... 19
4.2 Dependent Variables ... 22 3.3 Moderating Variable ... 23 4.4 Control Variables ... 24 4. Results... 24 5. Discussion ... 31 6. Conclusion ... 37 7. References ... 40 8. Appendix 1 ... 45 9. Appendix 2 ... 46 10. Appendix 3 ... 47 11. Appendix 4 ... 48 12. Appendix 5 ... 49 13. Appendix 6 ... 50 Table of Figures Figure 1. Conceptual Model... 18
Figure 2. Temporal Orientation Formula ... 22
List of Tables Table 1: Means, Standard Deviations, Correlations... 27
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1. Introduction
The schools of thought in organizational learning highly emphasize that in order to
achieve success and great performance in the company, the primary objective of any firm is to
maximize its profit (Bell, Whitwell, Lukas, 2002). External economic factors and organizational features are highly discussed as the main factors that influence firm’s success. However, little
attention is given to the competitive position of the firm (Hensen & Wernerfelt, 1989). As
businesses tend to focus on fast and substantial returns to achieve high performance in highly
competitive markets, recent economic events emphasize the apparent nearsightedness of US and
European firms in stressing short term gains and ignoring detrimental long term consequences.
In order to illustrate the consequences of such short termism, the global economic crisis
of 2008 is the most well-known example of a destructive concern on a global scale (Barton,
2011). To be specific, excessive mortgage lending in US up until 2008 falsely and temporarily
inflated collateral values due to large amount of risky subprime borrowers with impaired credit
history. Issuers relied on upfront payments by borrowers, neglecting their credit payment ability
and focusing on fast upfront gains. However, when the prices in housing market started
decreasing, subprime borrowers did not manage to repay their debts and defaulted. Thus,
excessive focus of loan issuers to collect upfront payments leading to fast profit left issuers liable
for the consequence of large long term debts, which eventually resulted in the economic crisis
worldwide (Bair, 2011).
Market conditions and trends are subject to continuous change, indicating that the
profitable decision taken today may have unexpected costs in the long term that are disastrous to
the economy as a whole. Time-related decisions play a key role in successfully developing and
6
relative importance given in strategic choices to investments with differing distributions of costs
and benefits over time’ (Souder & Bromiley, 2012, p. 552). Therefore, the example of the
economic crisis relates to the fact that loan issuers relied on upfront payments relaxing long term
consequences which implies short term orientation.
The literature of temporal orientation often references the concept of short termism that
has been cited in scientific literature as a cause disrupting business development in the long term
as well as destroying firms’ value, decreasing competitiveness and increasing firm failure rate
(Doyle, 1994). Short termism can be described as excessive focus of managers of firms on short
term outcomes disregarding the consequences in the long term that are vital for firms’ existence
and performance in the future, and is caused by firm’s culture, processes and routines (Dallas,
2011; Laverty, 2004).
The literature of short termism focuses on two major streams of the cause of managerial
myopia1: financial market pressures and managers’ incentives (Palley, 1997). Even though most
of the literature puts forward short termism having a negative influence on firm’s performance in
the long run, different views exist. Rahmandad (2012) suggests an alternative view on short
termism. The author claims that short termism has vital prominence for firms in order to
maintain a position and positive performance in a competitive market as well as increases firm’s
growth. Hence, a tradeoff between investments with different payoff horizons is necessary under
1
The concept of short termism is often substitutable to managerial myopia and they will be considered synonymous in this research. Bhojraj and Libby (2005, p. 3) define managerial myopia as ‘the desire to achieve a high current stock price by
inflating current earnings at the expense of longer-term cash flows (or earnings)’, and being caused by financial market
pressures or faulty decision making of managers (Laverty, 2004). However, Laverty (2004) makes a clear distinction between the terms, myopia being characteristic of decision making and short termism being a systematic characteristic of an organization.
7 competitive market pressures. Firms must pay a close attention to operational capabilities in
order to maintain day to day business, while investing in dynamic capabilities would ensure a
continuous growth and development of future business. Nevertheless, due to pressures of
competitive markets, firms tend to focus more on operations in order to compete in the market,
but neglect future growth investments, thus lacking a tradeoff that delivers superior business
performance. However, his view is not empirically tested and proven, mostly due to difficulties
and challenges in measuring short termism and temporal orientation (Laverty, 1996). In order to
fill in some of this literature gap, the aim of this research is to test whether short termism can have a positive effect on firm’s performance with regard to competitive market pressures. Thus,
the research question states:
‘Does market competitiveness influence the potential relationship between temporal orientation and firms’ performance?’
The research is intended to make several contributions to the existing literature in the
field. First, academic contribution is made in empirically testing an alternative view of short
termism influencing performance of the firms in competitive markets. Content analysis will add
significant value to the literature by suggesting recently developed measure of temporal
orientation by management cognitions, rather than relying on quarterly accounting data.
Differently than most of the literature in the field, this research will contribute in providing contrasting perspective on firms’ performance being possibly positively impacted by corporate
short termism. Also, little or no literature has taken into account market competitiveness as having a significant impact on the relationship of firm’s temporal orientation and performance,
8 In this paper mixed method research design is applied. First, content analysis method is
used to measure temporal orientation of the firms by analyzing quarterly conference calls
transcripts. Applying a dictionary of temporal orientation developed by DesJardine and Bansal
(2014), a ratio of firm’s temporal orientation is derived. Secondly, quantitative analysis method
is used to measure the moderating effect of market competiveness on the relationship of temporal
orientation and performance. Two alternative models are proposed regarding firms’ performance
measure. The first model uses return on assets (ROA) as performance measure, while the second
model uses stock price as an alternative performance measure in the analysis.
The paper is structured as follows: the paper begins with an extensive literature review in
the research field, including variety of aspects and views related to the topic of temporal
orientation and short termism. Following, the hypotheses are drawn upon the literature. Next,
introduction to the dataset of this research and variables used throughout the study are presented
as well as methodology used in the research is explained in great detail. Then, results of
regression analysis are presented and followed by discussion, limitations and recommendations
for future study as well as final conclusion.
2. Literature review 2.1 Temporal Orientation
The definition of temporality, temporal focus, and temporal orientation poses a
conceptual challenge for researchers, due to lack of consensus of the constructs of each one
(Shipp, Edwards & Lambert, 2009). Shipp et al. (2009, p. 4) define temporal orientation as a
‘cognitive involvement predominantly in the past, present, or future’ and provide a measure of
temporal orientation scale. The temporal orientation scale is initially developed by Holman and
9 different context of development of temporal orientation measure the scale overlooks the
variables such as personality and attitudes of the individual managing business and other
temporal builds involving organization as a whole. Hence, it poses a challenge of being applied
to measure temporal orientation of firms that are led by appointed individuals.
More recent research uses the term for the firm level analogue of temporal orientation.
On an organizational level, temporal orientation ‘can thus be viewed as a prevailing collective
preference of the firm on the basis of both the personal preferences of current managers and
their understanding of the firm’s own historical patterns’ (Reilly, Souder & Ranucci, 2016, p.
4). Nonexistence of solid and widely accepted definition of temporal orientation among
researchers incurs a challenge in studying time related concepts due to lack of theoretical
background and measurement methods. Despite these limitations, temporal research mostly puts
emphasis on the differences in individuals’ perceptions of the past, present and future, that highly
influence current behavior and decision making in organizational settings. Therefore, in this
research temporal orientation is defined as ‘the relative attention that management gives to the
long term and short term that directly or indirectly reflects on organizational level performance’
and will be referred to the firm level measure and reasoning.
The fact that temporal orientation is highly influenced by individual time perception is
observable in the research conducted by Das (1987). The author claims that individuals differ in
cognitive dominance of time perspective, therefore sets a basis for theoretical background in this
research. Individual with short sighted time perspective puts emphasis on sooner events as being
more essential, and other way around, positioning events in a distant future as of less importance.
The author states that strategic planning decisions and actions are dynamic by nature on
10 time flow, highlighting near sight events requiring more attention rather than the ones occurring
in longer time period. Thus, firm level analogue of temporal orientation is identified in the
primary research in the field as well. However, even though the planning horizon of the firm is
critical in forming the basis for resource allocation between short and long term returns, it still
highly depends on the nature of business as well.
That individual psychological perception with regard to temporality affect strategy and
decision making in the organization is discussed in more recent research by Nadkarni and Chen (2014) as well. The authors study CEO’s temporal focus and how individual perceptions of past,
present, and future determine the rate of introduction of new products in the company. New
product introduction rate signifies to what extent firms are able to adapt to market dynamics and
environmental change in order to achieve high performance rates resulting in competitive
advantage. Their findings suggest that individual CEO’s temporal attention determines the speed
of introduction of new products. In stable environments, new products are introduced faster when CEO’s attention is stronger towards the past focus. However, on the contrary, when
exposed to dynamic environments, CEO’s attention tends to be directed towards high present and
near future focus, indicating short termism and faster new product introduction rate. Hence, it
can be observed that temporal orientation of organization fundamentally starts with individual CEO’s or manager’s time perceptions, as they are individuals determining decision and strategy
making in the firm. An insight of inevitable managerial short termism is observed in the research
of Nadkarni and Chen (2014), due to CEO’s individual attention being focused on present or
near future matters, when company is exposed to fast changing market conditions that require
11 By means of managers determining decision making in the firm based on individual
insights, Souder and Bromiley (2012) point out that firm’s temporal orientation is based on the
fundamental incentives that are provided to the leaders of the firm that reflect on the decisions
taken when leading the firm. The authors hypothesize that executive compensation tied up to
stock options gives incentive for long term orientation, as stock may take several years to
increase in value. Moreover, company’s relative performance places a benchmark for managers
to act upon and determine investment allocation. The authors measure temporal orientation by durability of firm’s capital expenditures (CAPX) and its allocation within activities that reflect
different payoff horizons, and is predicted to profoundly influence firm’s performance. Hence,
the research of Souder and Bromiley (2012) lays the first positive and accessible measure of
temporal orientation of managers that is used in empirical research on organizational level.
However, research of Souder and Bromiley (2012) is limited to accounting data in their
measurements and calls for further and more precise investigation of temporal orientation of
managers with respect to their cognitive behaviors that reflect on a firm level.
2.2 Short Termism
The notion of temporal orientation consists of two constructs, namely, short term
orientation and long term orientation. Short termism has taken a main role in the literature as
being highly detrimental for long term performance of the firm. Thus, this section will review
the causes, origins and effects of short termism on corporate performance relying on existing
research.
In the literature of short termism, two diverse perspectives of origin of corporate
nearsightedness prevail. The first perspective relies on (1) financial capital market pressures as a
12 incentives. However, in the most recent literature a third perspective is apparent (3) identifying
market characteristics as possible cause of short termism. The next sections provide literature
review on each perspective.
2.2.1 Financial Markets Pressures
Firms are highly exposed to pressures from financial markets to maintain yearly or
quarterly profitability. Thus, firms tend to direct investments towards faster payoff opportunities
in order to comply with profitability requirements. Laverty (1996) claims that due to absence of
long term investments, firms lose their competitive advantage and are led to overall decline.
Also, management practices of discounting future earnings as well as heavily relying on
accounting profits fail to encourage investments with a longer payoff period that are vital for firms’ competitiveness in the long run. Moreover, stock markets are subject to blame for
corporate short termism due to undervaluation of investments that have a long term payoff
period. Hence, short term investments are preferred in order to increase commoditized share
price and avoid a potential takeover. Also, capital fluidity determines trade of shares among
investors seeking for short term payoffs, hence leading to absence of long term relationships and
shareholdings, setting a trend for short termism among companies heavily influenced by
financial markets.
Further exploring the literature regarding financial markets pressures as determinants for
corporate short termism, DesJardine and Bansal (2014) examine the influence of analysts of
financial markets and investors in determining managerial short termism. The authors base their
research on content analysis of archival data, measuring the perceptions of managers and their
decision making with regard to temporal orientation. The measurement they suggest relies on
13 termism. Frequent portfolio evaluations are based on narrow time frame, hence neglecting future
prospects. As a consequence, analysts that evaluate company’s portfolio base their projections on
short time horizon, comparing them to previous evaluations that have been undertaken.
Therefore, shareholders trade their stock based on such projections in analyst reports, leaving
managers with short term decision making on how to increase their performance due to loss
aversion and shares outstanding. Similarly, when analysts evaluate the stock high in their reports,
long term investments take place, as it leaves managers with longer time frames for decision
making as well as extend time horizons of investors. Hence, in the stream of literature relying on
capital market pressures responsible for determining temporal orientation and thereafter short
termism of the company, the negative effect on the performance of the firm in the long term is
often suspected and apparent. In contrast, long term investments are believed to have a positive
influence on the firms performance.
2.2.2 Managerial and Individual Incentives
In the literature exploring the causes of corporate short termism, individual incentives
are observed as well. First, the research of Laverty (1996) mentions an individual perspective to
short termism where agency theory comes in light when assessing moral hazard problem in
investment decision within firms. Private information of managers allows allocating investments
that increase their reputation and financial gains of organization in short term. Also, DesJardine
and Bansal (2014) base their research on prospect theory on individual level as well, where loss
aversion plays an important role in managerial decision making on organizational level. In this
section, the literature relying on managerial and individual incentives as a cause of short termism
14 It is often predicted that incentives given to the management play a major role when
making decisions for resource allocation within the firm. In fact, in addition to myopic investors
and analysts, Brochet, Loumioti, and Serafeim (2015) find that equity based executive
compensation is highly related to short term decision making in the firm when using conference
calls as a source measuring short termism. Their hypothesis based on content analysis goes in
line with initial hypothesis of Souder and Bromiley (2012) that executive compensation tied to
stock options is long term oriented as executives may wait several years for stock to appreciate,
hence providing incentive for longer time horizon decision making. However, the result of the
study from Brochet et al. (2015) does not support the hypothesis of stock compensation being
long term oriented incentive. Rather, content analysis in their research reveals shrinking time
horizon of managers when they are offered stock options for remuneration. Hence, from the
literature it can be observed that individual short termism is no less important cause of corporate
short termism than pressures of financial markets, hence creating a highly complex theoretical
construct of causes of short termism in organizations.
Despite the different nature and form of causes of short termism and taking into account
arguments in the literature, short termism in the corporations is apparent and is subject to the
cause of negative long term consequences. In contrast, long term oriented investments are
believed to increase firm performance in the long term. Therefore, hypothesis 1 is developed:
H1: Long term orientation of managers will positively influence firm’s performance.
2.2.3 Market Characteristics
Despite largely discussed causes of corporate nearsightedness such as financial market
15 short term focus of businesses. Building upon methodology of Souder and Bromiley (2012) to
measure temporal orientation by capital investments and resource allocation within firm,
Rahmandad (2012) introduces market level reasoning for corporate short termism regarding
allocation of resources, and frames it on resource-based view (RBV) of the firm. According to
Rahmandad (2012), investment in operation capabilities is considered as short term horizon
investment, while investing in dynamic capabilities determining future growth of the firm tends
to have a longer term payoff horizon. However, a tradeoff between such investments is crucial
for a firm to persist in the competition when market forces are in play and their growth potential
and survival is highly impacted.
Hensen and Wernerfelt (1989) indicate that very little attention is given to competitive position of the firm when measuring firm’s success. However, Rahmandad (2012) finds that
under uniform competition, described as ‘predetermined allocation policy’ (p. 142), firms
investing in operational capability grow faster as well as allowing competitors to gain share in
the market. As a result, firms that mostly invest in such capability remain in the market and take
away market share from slow growth firms. However, firms that build dynamic capability enter
the competition later and outperform the short-term focused companies. Under strategic
competition, describing firms that ‘rationally take into account the reactions of their competitors in determining their allocation policy’ (p. 142), similarly as under uniform competition, investing
heavily in dynamic capabilities causes slow growth and consequently a loss of market. Hence,
short term investment determining faster growth and survival in the market is preferred. The
author suggests that rapid market changes tend to decrease investments in dynamic capabilities,
while growth opportunities increase the value of operational capabilities. Moreover, market
16 proposes that focusing on operational capability, or more generally, short term investments may
have positive impact on firm’s growth and performance. The research of Rahmandad (2012)
proposes an alternative view on corporate short termism, innovatively suggesting weaker impact
of temporal orientation on firm’s performance in the long run when market competitiveness is
high. However, the study seeks for empirical testing to prove its propositions.
2.3Firm’s Performance and Growth
When measuring firms’ performance, the methods of measurement tend to greatly differ
among countries, therefore also differ in existing research. In the Western World, firms heavily
rely on return on assets (ROA) eventually disregarding other central measurements of firm’s
performance (Doyle, 1994). Therefore, a variety of possible measures for firm’s performance
prevail in the literature and the choice of measure in this research will be discussed in great detail
in a Data and Method section.
2.4 Market Competitiveness
The concept of market competiveness was apparent throughout the literature and it has
been suggested that managerial shortsightedness does not necessarily negatively influences firm’s performance as short term investment decisions may be inevitable in order for the
company to remain and compete in the market (Rahmandad, 2012).
In the dynamic market conditions strategy of the firm involves many aspects of temporal
decision making and other important strategy creation aspects should be taken into account as
well. For example, competitive forces can be seen as ultimate conditions in an industry to
achieve potential success. Porter (1979) names the threat of new entrants, the bargaining power
of customers and suppliers, the threat of products that can be substituted and industry rivalry.
17 company can defend itself from competitors and strive on the conditions that it is exposed to.
Firms are facing pressure from all types of industry forces, hence must deal with them
adequately in order to maintain the position in the market. However, industry forces are subject
to change therefore requiring vigilant assessments from managers on how to treat and encounter
each force with current capabilities in the possession of the company. The barriers to entry must
be established, selection of suppliers and target buyer groups must be chosen as those exerting
the least power. Moreover, existence of substitute products pose many constraints for the
businesses as well, as price ceilings must be set and the development of new products increases
the competition and consequently reduces the prices. Moreover, jockeying for position involves
factors that establish challenges for managers on how to compete, because ‘they are built into industry economics’ (Porter, 1979, p.143).
As a consequence of the market forces that are in play, intense competition causes slow
growth that eventually drives companies out of business. Hence, taking into account reasoning of
Rahmandad (2012) that short term investments into operational capabilities are vital for firms’
growth and industry forces indicated by Porter (1979), a legitimate assumption can be made that
in order for firms to survive fierce competition and maintain positive performance, short termism
is inevitable. Following such reasoning, the second hypothesis of this research is developed:
H2: High levels of market competitiveness will weaken or negatively moderate the
18 Regarding the hypotheses developed in this research, this paper will examine the effect of
market competitiveness on the relationship between temporal orientation of the firm and firm’s
performance. The conceptual model is drawn in the figure 1 below:
3. Data and Method
In this section, the data and research methodology used in this research is explained. In
order to test the hypotheses that are developed in the previous section, mixed-method research
design is applied. The sample data is collected from 303 publicly traded European companies
from 16 countries based on a year of 2006: The Netherlands, Germany, Belgium, Norway,
Sweden, Finland, Denmark, France, Italy, Switzerland, Portugal, Spain, Ireland, Greece, Austria,
and Luxembourg. The sample of companies covers 23 different industries that are diverse in size
and degree of competitiveness which is the subject matter in this research.
The sample data has been filtered for accuracy, thus, the final sample consists of 185
publicly traded European companies, as a number of them has been privatized, nationalized or
declared bankruptcy in years from 2006 to 2014. Nevertheless, the sample is still sufficiently
large and diverse, and allows for extended discussion of the results as they might be different
Figure 1. Conceptual Model
(+)
19 when controlling for different industries since they are not equally competitive. Limiting sample
to one continent provides uniformity in accounting practices as well as leads to more consistent
corporate governance, mainly, Continental-European (Rhineland) model (Aguilera & Jackson,
2003). Therefore, it allows for more univocal discussion and interpretation of the numerical
results. Moreover, publicly listed companies have their financial data freely available that eases
the procedure of data collection and its validity. However, it also limits the study as the most of
the largest firms operating in competitive US based markets.
4.1 Independent Variable and Content Analysis
In order to develop independent variable, content analysis method is applied. Previous
studies indicate diverse constructs and measures of temporal orientation, as well as widely apply
financial data in order to replicate time perceptions. However, financial data does not reflect the
individual and unobserved behavior of the managers of the firms. Due to such measurement
limitations, management and organization research tend to be highly quantitative and pose a
challenge in developing theoretical gaps in social perspective of the subject. Content analysis,
also known as text analysis, fills part of this gap by integrating qualitative and quantitative
approaches. Analyzing the content of the text with software aid allows for identifying characteristics, drawing interpretations of trends, and identifying other people’s cognitive
schemas (Kabanoff, 1997; Duriau, Reger & Pfarrer, 2007). Also, it allows analyzing a wide spectrum of organizational phenomena by accessing personal or group’s perceptions towards
structures such as values or attitudes (Duriau et al., 2007). Moreover, content analysis helps to
describe the focus of attention of individuals, groups or other units as well as analyzing the
contents of the documents that can identify the primary objectives of an organization (Stemler,
20 Using content analysis for developing independent variable will add significant value to
this research. First of all, it will allow incorporating unobserved attitudes and cognitive
perceptions of managers that cannot be captured in purely quantitative financial data. Also, it
will decrease the researcher demand bias, as well as help to overcome issues regarding validity
and reliability due to two-level analysis: text statistics and interpretation. Two-level analysis will
decrease misinterpretation risks as well (Duriau et al., 2007).
In this research, the methodology of DesJardine and Bansal (2014) will be replicated,
using content analysis in order to develop a measure of temporal orientation which is placed as
an independent variable in this research. Even though more recent dictionary of words indicating
temporal orientation is created by Brochet et. al., (2015), their dictionary is based on analyzing
only corporate call transcripts and consists only of eleven words. In order to compile more
comprehensive dictionary, DesJardine and Bansal (2014) analyze diverse corporate documents,
including conference call transcripts, annual reports, company press releases and other. Thus,
their dictionary is preferred in this research.
DesJardine and Bansal (2014) inductively create a list of words that reflects time
perceptions of higher management, as well as add time related words from previously established
dictionaries from the linguistic analysis programs. Then, each word is inflected and all possible
synonyms are added as well. Following, the words categorized into three groups: short term
horizon, long term horizon, and unclear. Using a Key Word in Context (KWIC) approach the
authors validate the keywords in their initial context. Such approach is employed in order to
guarantee that the word is used as expected: to reflect managerial time perception. This approach
allows for more comprehensive dictionary, removing time related keywords being followed by
21 the analysis, as they relate to a standard vocabulary used in financial statements. Words
indicating short term and long term orientation can be found in Appendix 1.
For this research, quarterly conference call transcripts were obtained from 303 different
public European companies for the year of 2006, and were retrieved from Thomson Reuters
database. However, the sample is reduced to 185 companies in order to match them with
available financial data used in regression analysis. Transcripts cover variety of industries,
different types and sizes of firms, therefore the sample is sufficiently large and diverse for
developing independent variable measuring temporal orientation. Also, they provide unscripted
and unedited source allowing for identification of cognitions of the management (Duriau et al.,
2007). Moreover, the final sample of 185 companies includes conference call transcripts from all
quarters. Even though the initial sample of 303 companies lacked transcripts from several
quarters, when total of 118 companies were removed from the sample due to bankruptcy,
privatization or nationalization, the rest of the sample was complete with all quarter transcripts.
Thus the sample is adequate and complete for computing a ratio of temporal orientation.
First of all, after obtaining the transcripts from Thomson Reuters database, the quarterly
transcripts from each company are added into one file in order to represent one entity for
development of the ratio of temporal orientation. Secondly, texts are edited and the text that does
not represent higher management is removed. Therefore, only the content of higher management
is taken into analysis in order to avoid analyst questioning bias while texts from the top
22 After counting the words indicating short or long term temporal orientation, they are put
into a formula of temporal orientation and ratios for each firm are derived.
Figure 2. Temporal Orientation Formula
4.2 Dependent Variables
Having developed a measure of temporal orientation, quantitative analysis will be
performed. Hence, in order to provide alternative measure of company’s performance next to
widely used ROA, market price of firm’s stock will be used as well as a variable indicating firm’s performance (Doyle, 1994). Stock market price directly measures and reflects public
information about company’s stock (Mitchell & Strafford, 2000). Also, its speed with keeping up
with expectations of future stock performance increases the share price in the longer term that
reflects efficiency of managers as well (Dobbs & Koller, 2005). Hence, due to lack of current
literature on short termism taking such measure into account, regression analysis using stock
price increase as performance indicator may provide different result than ROA being considered
as the only dependent variable. Regression analysis will test the relationship between temporal
orientation and ROA as well as temporal orientation and stock price.
The first model will use ROA as performance measure. The level of ROA indicates the percentage of company’s assets in generating profit, and is calculated by dividing net income
over total assets. Indices of ROA of sample companies are collected using company identifiers
(tickers) from Bureau Van Dijk database from 2006 to 2014. ROA is used in this research as the
23 sets a comparable benchmark for the second alternative testing model that is explained in the
next paragraph.
The second model uses stock market price as a measure of corporate performance (Doyle,
1994) that is often neglected in recent research, therefore, can potentially cause alternative
results in empirical testing. The stock price indicates the value investors are willing to pay for the
share and is the lowest amount that it can be bought for. Thus, it indicates market valuation of
the company among competitors in the stock market. The data on share market price is collected
from Bureau van Dijk database for years 2006 to 2014 on January 1st.
3.3 Moderating Variable
Finally, the moderating effect of market competitiveness on the relationship between
temporal orientation and performance will be tested. For a variable representing market
competitiveness Herfinadhl-Hirschman Index (HHI) index will be used and is retrieved from
Thomson Financial database for the year of 2006. HHI is computed by squaring the market
shares of the firms competing in the industry and then summing the squares up. In economics,
the degree of market concentration is often used as a measurement of competitiveness. HHI is
used to measure the concentration of the output. Low levels of index (approaching zero) state
perfect or monopolistic competition, hence high competiveness where squared market share of a
specific firm is 0 percent. At the higher end, high index level (approaching 1) states monopoly in
the market, when one firm has a market share of 100 percent and lower competitiveness in the
24
4.4 Control Variables
In this chapter, the control variables included in the analysis are described and explained.
First, country and industry dummies are used. The companies in the sample are based in 16
different European countries and are grouped into three geographical regions: Northern Europe
(NEU), Southern Europe (SEU), and Western Europe (WEU). Twenty-three industries are
grouped into six categories according to their four-digit Standard Industrial Classification codes
(SIC): mining and agriculture, allied products, manufacturing, transport and communication,
trade and financial services and other. The classification of countries and industries can be found
in Appendix 2. In addition, financial leverage index and financial beta will be used as control
variables as well. Financial leverage index reflects the debt financing that eventually negatively
affects earnings per share if financing relies mostly on debt. Financial beta is a measure that
reflects stock volatility compared to the market as whole. Financial leverage indices as well as
financial betas are retrieved from Thomson Financial database. All control variables are based on
the year of 2006 as a basis year in this research.
4. Results
Average ROA and increase in stock price are used as dependent variables in this
research. Thus, they are tested for normality. When both variables were tested for normal
distribution, they turned out to be skewed and kurtotic. Average ROA shows skewness of 0.925
(SE 0.179) and kurtosis of 0.851 (SE 0.355). Meanwhile, increase in stock price shows skewness
of -1.875 (SE 0.179) and kurtosis of 6.776 (SE 0.355). Shapiro-Wilk test rejects null hypothesis
(p<0.05) of data being normally distributed in both cases (Shapiro & Wilk, 1965). Hence, both
25 for normal distribution, average ROA had a mean of 6.5662 and standard deviation of 0.30754,
and increase in stock price had a mean of 0.2254 and standard deviation of 0.8834, with 185
observations in both cases. Thus, after both dependent variables are transformed for normal
distribution, further analysis is conducted.
Descriptive statistics of the data after transforming for normal distribution, as well as
Pearson correlations between dependent, independent and control variables are shown in Table 1.
After transformation, average ROA has a mean of 2.241 and standard deviation of 0.843,
showing that values of ROA are widely spread from the mean. The mean of increase in the stock
price changed to 0.319 and new standard deviation is 0.156. The main dependent variable
representing temporal orientation has a mean of 0.340 and standard deviation of 0.198, showing
that the data are quite concentrated around the mean.
Interestingly, it turns out that several control variables are significantly correlated with
main independent variable representing temporal orientation. Thus, the effect of temporal
orientation might be strengthened or weakened by control variables. Specifically, financial
leverage (-0.175) is significantly correlated with temporal orientation at 0.05 significance level.
Also, control variable representing North Europe (-0.327) indicates tendency for negative
correlation with temporal orientation, while West Europe (0.320) indicates tendency for positive
correlation with temporal orientation at 0.01 significance level. Average ROA (-0.049) and
increase in stock price (-0.029) do not indicate significant correlation with temporal orientation.
However, it shows negative effect of temporal orientation on average ROA and increase in stock
price, and vice versa. Moreover, significant positive correlation appears between average ROA
and increase in stock (0.328) at 0.01 significance level, thus indicating that both performance
26 shows significant negative correlation with financial beta at 0.01 significance level (-0.240), thus
indicating response to market returns. Also, significant positive correlation at 0.01 significance
level is observed between average ROA and North Europe (0.197), while alternative
performance measure of increase in stock price significantly and positively correlates with South
Europe (0.291). Also, increase in stock shows significant negative correlation with transport and
communication industry (-0.230) at 0.01 significance level.
In order to test the first hypothesis in this research, whether long term orientation of
managers will positively influence firm’s performance, two OLS regression models are
constructed. The first model uses average ROA as performance indicator and dependent variable,
where temporal orientation is main independent variable. Following, the model includes
controls: financial beta, financial leverage, South Europe, North Europe, and the following
industries: mining and agriculture, allied products, manufacturing, transport and communication,
and trade and financial services. Western Europe and Other industry group are excluded from the
27
Table 1: Means, Standard Deviations, Correlations
Variable Mean SD N Temp_Or AvgROA Stock HHI Beta Leverage NorthEU SouthEU WestEU Min_Agr Allied Manufact Transp _Com Trade& Finance Other Temp_Or .340 .198 185 1 AvgROA 2.421 .843 185 -.049 1 Stock .319 .156 185 -.029 .328** 1 HHI .507 .234 182 .093 .142 .075 1 Beta 1.072 .581 183 .018 -.240** .001 -.069 1 Leverage .357 .149 183 -.175* .140 .060 .091 -.145 1 NorthEU .238 .427 185 -.327** .197** .105 .048 .043 .350** 1 SouthEU .157 .365 185 -.047 -.120 -.291** .054 -.162* -.066 -.241** 1 WestEU .605 .490 185 .320** -.083 .125 -.082 .082 -.258** -.692** -.534** 1 Min_Agr .178 .384 185 -.078 .124 .088 .099 -.079 .026 .038 .187* -.173* 1 Allied .173 .379 185 -.012 .044 .098 -.125 .023 .163* .114 -.158* .018 -.213** 1 Manufact .227 .420 185 -.041 -.137 .078 .041 .196** -.086 .061 -.092 .015 -.253** -.248** 1 Transp_Com .200 .401 185 .021 .018 -.230** .009 -.124 -.087 -.089 .193** -.066 -.233** -.229** -.271** 1 Trade_Fin .092 .290 185 .033 .045 -.082 .043 .015 -.094 -.090 -.034 .104 -.148* -.145* -.172* -.159* 1 Other .130 .337 185 .100 -.079 .036 -.074 -.049 .081 -.065 -.122 .147* -.180* -.177* -.209** -.193** -.123 1
.* Correlation significant at 0.05 level .** Correlation significant at 0.01 level
28 Regression analysis is performed in order to examine the ability of temporal orientation
to predict levels of firm performance, after controlling for previously mentioned variables. In the
first step in SPSS, all control variables are entered and detailed regression results can be found in
Appendix 3. This model is statistically significant F (9, 171) = 3.457; p<0.05 and explains 15.4%
of variance in average ROA. After entry of temporal orientation at Step 2 into the model, the
total variance explained by the model remains 15.4% F (10, 170) = 3.105; p<0.05. The
introduction of temporal orientation does not add any additional explanation to the variance of
average ROA after controlling for control variables (R2 Change = 0.001; F (1, 170) = 0.102;
p>0.05). In the final model, three out of ten predictor variables are statistically significant, with
industry of mining and agriculture having the highest Beta value (β=0.22, p<0.05), thus
indicating that companies in this industry perform superior relative to other industries. Moreover,
companies from South Europe (β=-0.17, p<0.05) negatively influence average ROA, thus
indicating poor performance in this region relative to Western region. In addition, financial beta
has marginally significant and negative effect on average ROA (β=-0.24, p<0.001), thus
indicating average ROA being responsive to negative market returns. However, temporal
orientation does not have significant influence on average ROA, thus hypothesis 1 in this model
is not supported when using average ROA as performance indicator.
In order to test the second hypothesis whether high levels of market competitiveness will
weaken or negatively moderate the relationship between long term orientation of managers and
firm performance, HHI from 2006 is used as variable for measuring market competitiveness to
test the moderating effect, and detailed test results can be found in Appendix 3. The regression
coefficient for HHI x Temporal Orientation (XM) is b3=-0.49 and is not statistically different
29 measuring firms’ performance is not dependent on market competitiveness in this model and
hypothesis 2 is not supported.
In the second model of this research, increase in stock price is used as dependent variable
and the rest of the model is identical, and detailed regression results can be found in Appendix 4.
This model is statistically significant F (9, 171) = 3.429; p<0.05 and explains 15.3 % of variance
in stock price increase. After entry of temporal orientation at Step 2 into the model the total
variance explained by the model does not change from 15.3%, F (10, 170) = 3.073; p<0.05. The
introduction of temporal orientation does not add additional explanation to the variance of stock
price increase after controlling for control variables (R2 Change = 0.001; F (1, 171) = 0.037;
p>0.05). In the final model, only one out of ten predictor variables is statistically significant,
with South Europe (β=-0.28, p<0.001) negatively influencing stock price increase relative to
Western Europe. Thus, hypothesis 1 in this model is not supported.
In order to test the second hypothesis, HHI from 2006 is used as variable indicating
market competitiveness and stock price increase as dependent variable, and the results can be
found in Appendix 4. The regression coefficient for HHI x Temporal Orientation (XM) is
b3=0.02 and is not statistically different from zero, t (178) = 0.4181, p>0.05. Similarly as in the
previous model, the effect of temporal orientation to influence stock price increase measuring firms’ performance is not dependent on market competitiveness in this model, and hypothesis 2
is not supported when using stock price increase as dependent variable. Again, since no effect of
temporal orientation on firm performance was found in the first hypothesis, consequently, the
effect is absent in the second hypothesis as well.
All models in hypothesis testing are tested for multicollinearity in order to establish
30 High multicollinearity (VIF>5) indicates presence of multicollinearity, whereas the model could
be no longer further investigated. However, after testing all models for multicollinearity, no
unacceptable levels are shown. In all models VIF<3, thus, none of independent variables are
linear with each other.
Also, models are tested for heteroscedasticity in order to check whether variances of
residuals are dispersed from others in order to validate OLS regression results. However, no
heteroscedasticity is detected in the models. Thus, the variances in all models are homoscedastic.
After validating regression results, several other regression analyses are performed with
variations of original models. First of all, hypothesis 1 is tested by splitting average ROA to the
pre economic crisis and after averages. The regression results can be found in Appendix 5.The
first regression model has tested whether temporal orientation has an effect on average ROA
before the crisis, and second model has tested whether temporal orientation has an effect on
average ROA after the crisis. In the first model, no explanatory effect of temporal orientation is
detected and the model is insignificant (p>0.05). In the second model, average ROA after the
crisis is used as dependent variable. In this case, the model is significant (10, 164) = 3.262;
p<0.05. Interestingly, after adding temporal orientation to this model, R2 increased by 1%, thus,
the model explains 18% of variance in average ROA after the crisis. Moreover, after adding
temporal orientation to the model, Mining and Agriculture industry shows a positive significant
effect (β=0.22, p<0.05) on average ROA after the crisis relative to other industries. However,
temporal orientation does not have a significant effect, thus the model does not support
hypothesis 1, but shows more sensitivity to control variables during the after-crisis period.
Following the findings of splitting dependent variable into before and after crisis, a model
31 detailed regression results can be found in Appendix 6.The model using increase in stock price
before the crisis is statistically significant (10, 165) = 2.478; p<0.05, as well as the model after
the crisis (10,163) = 2.248; p<0.05. North Europe has statistically significant positive effect
before and after the crisis on stock price increase (β=0.21, p<0.05) relative to Western Europe.
Also, mining and agriculture (β=-0.21, p<0.05) as well as allied products(β=-0.22, p<0.05)
industries have statistically significant negative effect on stock price increase after the crisis
relative to other industries. However, temporal orientation does not have significant effect on
stock price increase neither before nor after the crisis, and the total variance of increase in stock
price before the crisis explained is 13%which decreases to 12% after the crisis period in this
model. Thus, hypothesis 1 in this research of temporal orientation having a positive influence on firm’s performance is not supported.
The second hypothesis was tested in both models as well. However, market
competitiveness weakening the relationship between temporal orientation and firm performance
is supported neither before nor after crisis. However, various statistical tests proved the data
being reliable and valid, thus, the discussion of the results is presented in the next section.
5. Discussion
In this section the findings of the research are presented and discussed in more detail. The
meaning and the importance of the findings as well as insights from existing studies in the field
are debated too. To conclude, the section will summarize the limitations of the study and will
make suggestions for the future research.
The first hypothesis testing whether long term orientation of managers will positively influence firm’s performance is tested using two different performance measures in order to spot
32 main performance measure among Western companies, measuring how profitable a firm is
relative to its total assets. ROA is the most commonly used performance measure in the literature
as well, thus, it is used as a plausible measure in this research. As an alternative to the most
commonly used measure, stock price increase is used as a company performance measure as
well. Stock price indicates the highest price that investors are willing to pay for a share of
company’s stock, thus indicating how well the stock is performing in financial markets.
Therefore, stock price is a relevant and credible alternative measure next to widely used ROA.
The regression result in both models did not find any significant relationship between
temporal orientation and firm performance despite different performance measures. From the
economic point of view, the research of Denning (2015) found that ROA ratios have been on a
steady decline over the last fifty years, thus, they may create bias in the result as well. In 2016,
global ROA accounts for only a quarter of ROA in 1965, thus indicating poor performance
globally (Denning, 2015). In this case, it suggests that ROA as performance measure is
decreasing globally, and thus might not indicate the accurate result in this research. Therefore,
decreasing performance in the long run might be caused by a global trend and not necessarily
corporate short termism. Financial beta shows significant negative relationship with average
ROA. It shows that ROA is highly based on firm’s financing decisions, and firms with higher
betas tend to have lower ROA. However, it is contradicting the general rule of higher betas
providing higher returns. Therefore, it is important to take into account that global decline in
ROA can provide results contradicting general theory in a large sample of businesses, especially
recovering from a downturn after financial crisis of 2008. Moreover, South Europe indicates
33 countries such as Spain, Portugal and Greece in the model, which indeed sunk into crisis the
most in the European region.
In the model using stock price increase as performance measure, similar results have been
found. The model does not support the first hypothesis either and does not indicate the relationship between temporal orientation and firm’s performance. Denning (2014) notes that
long term focus slows down the business development that is eventually soaring the share price
as well. The author notes that while companies focus on long term roadmaps, it incurs fading of
capability and technical competence, wrecked business model, and aging employee point of view
that eventually decreases stock price and overall business performance. Denning’s (2014) view is
similar to that of Rahmandad (2012), emphasizing a tradeoff between balanced investment as
inevitable action of companies in order to keep their position in competitive markets. Moreover,
only control variable representing South Europe incurs negative and significant effect on stock
price. Again, poor performance of Southern countries during financial crisis and inability to
recover is apparent in the regression result, which goes in line with the result found in the model
using ROA as performance measure.
The measure of temporal orientation may have significant result bias as well. While the
measure is constructed using the conference call transcripts to detect unobserved behavior of
management, other studies were highly dependent on accounting data in drawing conclusions of short termism being detrimental for company’s’ long term performance. Also, it is important to
note that conference calls transcripts are based on a year of 2006, while high levels of short
termism are highly emphasized in more recent years. Also, the methods might deliver differing
34 suggested in order to capture the potential gap between the two as well as performing content
analysis with the data from the most recent years.
Beside no significant relationship between temporal orientation and firm performance,
the insight of Rahmandad (2012) and hypothesis 2 in this research of market competitiveness
weakening the relationship is not supported in both models either. As the theory of Rahmandad
has not been tested empirically before, this research gives an insight that even though in previous
research the relationship between temporal orientation and firm performance is found, it may not
necessarily be influenced by market competitiveness. In the traditional point of view on business
strategy, companies focus on identifying direct competitors that offer similar products in order to
outperform them and gain sustainable competitive advantage.
In the current economies, strategic myopia is becoming of a major issue as companies
compete beyond their original industries. Consumers incur liquid expectations and expect the
highest quality service or product, regardless the sector or industry the provider or producer
originates from. (Accenture, 2016). Thus, producers and service providers compete in arenas in
order to gain consumers regardless their original industry boundaries. To this day, most leaders
and research rely on frameworks that were designed and applied in previous decades of business
operations where the single idea of strategy is relevant only in order to develop sustainable
competitive advantage (Porter, 1998). However, as companies are exposed to the competition
beyond their initial industry, competitive advantages become temporary and no longer
sustainable in current markets disrupted by innovations. McGrath (2013) argues that competitive
advantage is transient, thus developing long term strategies are no longer relevant for many
companies. In that case, businesses find themselves competing across industries, capturing
35 important to note that market competitiveness is highly increasing and crossing its boundaries.
Thus, it may indeed weaken the relationship between temporal orientation and firm performance,
as transient advantages require rapid learning and reaction to the changing and liquid consumer
expectations, in order to sustain the presence in the competitive markets. It is possible that
market competitiveness has no effect in this research due to being limited to the year of 2006 and
the innovations has been disrupting industries in more recent years. In that case, market
competitiveness levels from 2006 may not reflect on the most recent performance measures
However, further empirical research is necessary as the result is not visible in the regression
analysis of this research.
The additional investigation of the topic has split the data into pre- and post-crisis in
order to see whether result of this research can be impacted by the presence of crisis. It turned
out to deliver remarkable results. While the model using ROA before crisis was insignificant,
model with ROA after crisis turned out to be significant and explained 18% of the variance
(Appendix 5). Also, in this model several control variables turned out to be significant in the
period after crisis. Moreover, two separate pre- and post-crisis models using stock price increase
also showed different results as well as turned out to be significant (Appendix 6). However, the
decrease in variance explaining the model is observed after crisis, which dropped from 13% to
12%, but no significant effect of temporal orientation is observed. Even though temporal
orientation did not add any explanation power in any of the models and was insignificant, it can
be predicted that post-crisis measures may have different effect in hypothesis testing in future
research, due to financial crisis possibly causing bias in this research. Thus, further data
36 The study conducted has several limitations that can be overcome in future research.
Tthis study adds significant value to the previous research as it uses mixed-method analysis in its
conduct as only a few studies did so far. Even though this study did not find the expected result,
a number of previous studies are based on a sole research method; therefore the mixed method
should be further applied and investigated in different samples. In addition, qualitative content
analysis is highly recommended as well in order to expand the research field where most of the
studies are based on accounting data. Also, it is important to note that the data of companies’
performance measures cover years from 2006 to 2014, while temporal orientation of managers is
limited to the data from year of 2006. Overall, the post-crisis performance may not be long-term
focused as much as previous research suggests in its theory, as no effect is found in both models.
However, model modifications to pre- and post-crisis periods showed post-crisis sensitivity
towards control measures, while no effect of temporal orientation based on year 2006 was found.
Therefore, further investigation of temporal orientation based on post crisis or data from several
years can be suggested in order to validate the hypothesis of this research.
Limitations regarding the research sample are apparent as well. The sample is restricted
to only 185 European publicly traded companies which may account for insignificant results;
thus, extending the sample with companies from other regions and especially US would have
significant value for the research as it would cover large variety of industries and firms of
different size.
Furthermore, as there is no globally accepted measure for company’s performance, it is
recommended for future research to investigate different measures and effects on the relationship
with temporal orientation. Using a variety of different measures to represent firm’s performance
