Measuring Corporate Investment Horizons and Identifying Short-Termism

61 Pages Posted: 24 Mar 2021

See all articles by Andreas Knetsch

Andreas Knetsch

Leibniz Institute for Financial Research SAFE; RWTH Aachen University

Date Written: May 19, 2020

Abstract

This paper proposes an empirical approach to capture investment horizons. I utilize this method to analyze short-termist investment. It relies on information which is not observable to investors in the period of investment and therefore considers the nature of short-termism as an agency problem. My empirical findings establish the validity of the introduced approach by relating it to an existing measure of investment horizons as well as multiple firm characteristics which are connected to short-termism. I observe that investment horizons are shorter for firms that inflate their reported income through real or accrual-based earnings management and for firms whose stock prices are more sensitive to earnings surprises. I also investigate which governance mechanisms are effective in curtailing short-termism. Managerial entrenchment, analyst coverage, institutional ownership, the effectiveness of the board of directors, and managerial long-term compensation all relate to longer investment horizons and thus less short-termism.

Keywords: short-termism; investment horizons; asymmetric information; corporate governance

JEL Classification: G31, G34

Suggested Citation

Knetsch, Andreas, Measuring Corporate Investment Horizons and Identifying Short-Termism (May 19, 2020). Available at SSRN: https://ssrn.com/abstract=3810872 or http://dx.doi.org/10.2139/ssrn.3810872

Andreas Knetsch (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

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