Question

2. What is the expectations treadmill and how does it affect managers' ability to deliver above average TRS over long period of time?

Answer 1

The term ‘expectations treadmill’ means that a company’s stock price is driven by expectations. In other words the higher the expectations that an investor has from a company’s stock the faster the investor will have to put in effort to keep up with the stock.

The speed of a treadmill is analogous to the expectations that are built into the share price of a company’s stock. If the company is able to beat those expectations on a sustainable basis then its stock prices will go up.

Expectations treadmill affects managers' ability to deliver above average TRS over long period of time. TSR = total return from a stock = capital gains+dividends.

Now when expectations are high managers will focus on those activities which will ensure more value creation and that generate high returns on the capital. Managers will actively pursue activities like discovery of new customer segments rather than focus solely on earning profits and paying dividends. This is because dividends do not create value. Thus managers focus more on value creation and as such expectations treadmill forces managers also to put in effort to keep up with the high expectations and this affects their ability to deliver above average TRS over long period of time.