Investor short-termism and real investment
56 Pages Posted: 13 Dec 2019 Last revised: 9 Apr 2021
Date Written: November 12, 2019
Short-term traders could affect the informativeness of stock prices about long-run fundamentals. Less (more) short-termism may thus induce managers to rely more (less) on stock prices in real investment decisions. Supporting this notion, we show that, for a large sample of U.S. stocks over 1983-2016, the investment-to-price sensitivity is inversely related to two short-termism proxies (controlling for firm size): institutional investor churn and liquidity. We confirm this finding using decimalization and an increase in mutual fund disclosure frequency as exogenous shocks to short-termism. Furthermore, short-termism is associated with an increased likelihood of voluntary capital expenditure forecasts by managers, suggesting a greater tendency to solicit market feedback when short-termism is high.
Keywords: investor short-termism, market liquidity; real investment; investment-to-price sensitivity
JEL Classification: G14, G31
Suggested Citation: Suggested Citation