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Short-Term Investors, Long-Term Investments, and Firm Value

45 Pages Posted: 23 Jan 2016 Last revised: 14 Mar 2017

Martijn Cremers

University of Notre Dame

Ankur Pareek

Rutgers University

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH

Date Written: March 14, 2017

Abstract

This paper shows that an inflow of short-term institutional investors predicts an increase in the likelihood that firms cut R&D investment to report higher earnings and to generate positive earnings surprises, and it also predicts a temporary boost in firm valuations. When short-term investors subsequently leave, the reductions in R&D, higher earnings, and the increase in firm valuations are reversed. Our identification strategy exploits plausibly exogenous variation in the presence of short-term investors around Russell 2000 index inclusions, which are associated with a sharp temporary inflow of short-term investors and a permanent increase in institutional ownership and analyst coverage.

Keywords: short-termism, managerial myopia, investment, misvaluation

JEL Classification: G31, G34, M12, M52

Suggested Citation

Cremers, Martijn and Pareek, Ankur and Sautner, Zacharias, Short-Term Investors, Long-Term Investments, and Firm Value (March 14, 2017). Available at SSRN: https://ssrn.com/abstract=2720248

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Ankur Pareek

Rutgers University ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1646 (Phone)

Zacharias Sautner (Contact Author)

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

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