Real Economy Effects of Short-Term Equity Ownership

Forthcoming, Journal of International Business Studies

37 Pages Posted: 29 Sep 2015

See all articles by John E. Thanassoulis

John E. Thanassoulis

University of Warwick - Warwick Business School; UK Competition and Markets Authority; Oxford-Man Institute, University of Oxford

Babak Somekh

University of Haifa - Department of Economics

Date Written: September 21, 2015

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.

Suggested Citation

Thanassoulis, John E. and Somekh, Babak, Real Economy Effects of Short-Term Equity Ownership (September 21, 2015). Forthcoming, Journal of International Business Studies, Available at SSRN: https://ssrn.com/abstract=2666448

John E. Thanassoulis (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

HOME PAGE: http://https://sites.google.com/site/thanassoulis/

UK Competition and Markets Authority ( email )

Victoria House
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Oxford-Man Institute, University of Oxford ( email )

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Oxford, Oxfordshire OX2 6ED
United Kingdom

Babak Somekh

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel

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