Are US Firms Becoming More Short-Term Oriented? Evidence of Shifting Firm Time Horizons from Implied Discount Rates, 1980-2013

Abstract

We provide evidence that investors in US public markets are increasingly discounting firms’ expected future cash flows during 1980-2013. This trend is shown not only on average across firms, but also within firms over time after alternative explanations are accounted for. To corroborate a link with firm time horizons, we estimate the relationship between an implied discount rate (‘IDR’) and factors relevant to firm long-term strategy. We find that IDR is correlated in expected ways with firm investments, management incentives, financial health, ownership and external pressures - measures that have been argued to correlate with firm time horizons. This paper represents one of the first attempts to document market-wide evidence of shortening firm time horizons. These changing horizons bear important implications for firm strategy.

Keywords: Short-Termism, Myopia, Institutional Investing, Financial Economics, CEO Compensation, Time Horizons

JEL Classification: D22, D92, G23, G32, M21