Confounding Effects of Market Inefficiency: A Crisis in the Financial Markets and National Economy

Keywords: Investment Short-Termism; Market Inefficiency; Agency Theory; Corporate Governance; Market Volatility; Investment Risk; Firm Performance

Abstract: The objective of this manuscript is to review the adverse influence of short-termism in investing on firm performance and corporate governance, and highlight the economic crisis engendered by the inefficient financial markets and advocate remedies to align the corporate governance practices toward enhancing long-term financial health. We critique the major assumptions of the market-efficiency hypothesis (MEH) and deliberate on the factors that promote short-termism in investing and trigger stock market volatility. By juxtaposing the key assumptions and fallacies of the unfettered financial market in the highly interconnected modern digital economy, we uncover its confounding effects and inherent contradictions concerning economic growth and sustaining the quintessential industries.