Short-termist Investment and Time Preferences

Abstract

This paper investigates the effect of shareholder and manager time preferences on short-termist investment behavior. Our theoretical analysis shows that managerial future orientation curtails short-termism whereas shareholder patience exacerbates it. We test these predictions by comparing the effects of time preferences on investment horizons of listed and unlisted firms in a sample of European firms. Based on the assumption that unlisted firms suffer from less asymmetric information, the effects of future orientation on investment horizons that are exclusive to listed firms provide weak support for our hypotheses. When considering future orientation on a national level, we find some evidence for firms in more future-oriented countries investing more long-term oriented. We can however not confirm the widespread notion that firms in more future-oriented countries suffer from less short-termism.

Keywords: agency conflicts, investment behavior, time preferences, short-termist investment

JEL Classification: G31, Z10, O57, G41