Short-Termism, Investor Clientele, and Firm Risk

Abstract:     
Using conference call transcripts to measure the time horizon that senior executives emphasize when they communicate with investors, we explore the effect of managerial short-termism on firm’s investor clientele and risk. We find that our measure of short-termism is associated with various proxies for accruals and real earnings management, suggesting that our proxy captures not just different disclosure strategies, but also different managerial styles. Next, we show that firms focusing more on the short-term have a more short-term oriented investor base. Moreover, we find that short-term oriented firms have higher stock price volatility, and that this effect is mitigated for firms with more long-term investors. We also find that short-term oriented firms have higher equity betas and as a result higher cost of capital. However, this result is not alleviated by the presence of long-term investors, consistent with these investors requiring a risk premium for holding the stock of short-term oriented firms. Our results hold after controlling for the endogeneity between short-termism and both investor clientele and risk.

Number of Pages in PDF File: 60

Keywords: short termism, conference calls, investor base, risk, cost of capital

JEL Classification: G12, G14, G21, M41

working papers series