Real Economy Effects of Short-Term Equity Ownership

Abstract

Investor time horizon varies by company, industry and economic system. In this paper we explore the importance of this variation by studying the impact of shareholder time horizon on the investment decisions of the firms they own, and externalities on the wider market. We demonstrate theoretically that short-term shareholders cause Boards to care about the path of the stock price, rationalising firms' pursuit of investments for signalling reasons at the expense of long-term value. We demonstrate that short-termism has spillover effects, leading to higher costs of equity capital; bubbles in the price of input assets; and predictable excess returns. We build testable cross-country hypotheses and evaluate these using existing evidence coupled with a new dataset on owner duration of U.S. and Germanic firms.

Keywords: investor time-horizons, short-term shareholders, bubbles, cost of capital, short-termism, signaling, shareholder register.

JEL Classification: G12, G34, L21, L25.