Short-Term Investors, Long-Term Investments, and Firm Value
45 Pages Posted: 23 Jan 2016 Last revised: 14 Mar 2017
Date Written: March 14, 2017
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: Suggested Citation