{"id":4549,"date":"2016-01-25T14:00:56","date_gmt":"2016-01-25T14:00:56","guid":{"rendered":"http:\/\/blog.frankfurt-school.de\/?p=4549"},"modified":"2019-02-20T14:01:43","modified_gmt":"2019-02-20T13:01:43","slug":"long-term-investment","status":"publish","type":"post","link":"https:\/\/blog.frankfurt-school.de\/de\/long-term-investment\/","title":{"rendered":"Do firms with short-term investors spend less on long-term investment?"},"content":{"rendered":"

Recent survey evidence suggests that many executives are willing to take short-term actions that are detrimental to long-term firm value, such as cutting long-term investments. It is often argued that these myopic actions are taken in response to pressures by short-term investors. For example, Nobel laureate Edmund S. Phelps is concerned about the effects of short-horizon investors for long-term economic development, arguing that in \u201c\u2026established businesses, short-termism has become rampant.<\/p>\n

In a\u00a0new study<\/a>, me and my coauthors Martijn Cremers and Ankur Pareek study the effects of short-term investors on long-term investment and firm valuations. \u00a0Our empirical proxy for the presence of short-term investors is a new measure of the stock holding duration of institutional investors. This measure, called Stock Duration, is calculated as the weighted-average length of time that institutional investors have held a stock in their portfolios.<\/p>\n

We first study whether firms spend less on R&D, our proxy for long-term investments, and report higher earnings in the presence of short-term investors. We focus on R&D expenses, as these are investments whose benefits are likely manifested only in the long-run, while their expenditures depress current earnings. In particular, as R&D spending is expensed directly on a firm\u2019s income statement, a reduction in these discretionary expenditures allows the firm to report higher current earnings. This can boost the firm\u2019s stock price in the short term, if investors na\u00efvely use earnings-based multiples to derive their estimate of firm value or misinterpret positive earnings surprises that result from R&D cuts. Therefore, any pressure from short-term investors may cause executives to reduce R&D to report higher earnings, and markets may not be able to immediately determine whether such R&D reductions are suboptimal due to asymmetric information.<\/p>\n

Using our Stock Duration measure, we document that firms cut R&D spending, report higher earnings, and generate positive earnings surprises when short-term investors enter as shareholders. Furthermore, the increased presence of short-term investors tends to be temporary only and reverses after a few years. Consistent with this pattern, we find that both R&D expenses and reported earnings reverse when the inflow of short-term investors also reverses, confirming that the effects from temporary increases in short-term investors are only transitory.<\/p>\n

We then show that these changes in the presence of short-term investors are related to firm valuations. As short-term investors move\u00a0en masse<\/em>\u00a0into particular stocks, their equity market valuations increase substantially relative to fundamentals\u2014but only temporarily. Contemporaneously, a standard-deviation decrease in Stock Duration (0.7 years) is associated with an increase in the market-to-book ratio of 13%. More importantly, this large valuation increase is followed by a predictable decline in the market-to-book ratio. Economically, a standard-deviation decrease in Stock Duration this year is associated with a decrease in next year\u2019s market-to-book ratio of 9%. The market-to-book ratio then reverses to its initial level over the subsequent year. This predictable reversal is consistent with the previous valuation increase reflecting overvaluation.<\/p>","protected":false},"excerpt":{"rendered":"

Recent survey evidence suggests that many executives are willing to take short-term actions that are detrimental to long-term firm value, such as cutting long-term investments. It is often argued that these myopic actions are taken in response to pressures by short-term investors. For example, Nobel laureate Edmund S. Phelps is concerned about the effects of […]<\/p>\n","protected":false},"author":654,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[37,33],"tags":[129,85,86,97,126,101,131],"class_list":["post-4549","post","type-post","status-publish","format-standard","hentry","category-finance","category-research-and-advisory","tag-banking","tag-finance","tag-forschung","tag-international","tag-management","tag-newsletter-en","tag-zahlungsverkehr"],"acf":[],"_links":{"self":[{"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/posts\/4549","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/users\/654"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/comments?post=4549"}],"version-history":[{"count":4,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/posts\/4549\/revisions"}],"predecessor-version":[{"id":17949,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/posts\/4549\/revisions\/17949"}],"wp:attachment":[{"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/media?parent=4549"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/categories?post=4549"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.frankfurt-school.de\/de\/wp-json\/wp\/v2\/tags?post=4549"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}