Short-Termism, Investor Clientele, and Firm Risk
Executive Summary — In recent decades, commentators have argued that many corporations exhibit short-termism, a tendency to take actions that maximize short-term earnings and stock prices rather than the long-term value of the corporation. The authors develop a proxy for short-termism at the company level using conference call transcripts and then examine whether companies with more short-term horizons have (i) an investor base that is more short-term oriented, (ii) higher stock return volatility, and (iii) higher equity beta. The authors find that short-term oriented firms have more short-term oriented investors and higher risk. This paper contributes to the literature on the capital market effects of managerial and investor horizons. Key concepts include:
- Short-termism affects investor clientele but also firms' risk.
- Short-termism is non-diversifiable risk. Long-term investors require a risk premium for holding stocks of short-term oriented firms.
- Corporate short-termism is negatively associated with the extent to which long-term investors hold a firm's stock.
- Corporate short-termism is positively associated with return volatility. This is consistent with firms that have greater short-term emphasis (i) attracting investors that are more sensitive to short-term news and (ii) being more responsive to short-term news in their own planning decisions.
Using conference call transcripts to measure the time horizon that senior executives emphasize when they communicate with investors, we explore the effect of managerial short-termism on firm's investor clientele and risk. We find that our measure of short-termism is associated with various proxies for accruals and real earnings management, suggesting that our proxy captures not just different disclosure strategies, but also different managerial styles. Next, we show that firms focusing more on the short-term have a more short-term oriented investor base. Moreover, we find that short-term oriented firms have higher stock price volatility, and that this effect is mitigated for firms with more long-term investors. We also find that short-term oriented firms have higher equity betas and as a result higher cost of capital. However, this result is not alleviated by the presence of long-term investors, consistent with these investors requiring a risk premium for holding the stock of short-term oriented firms. Our results hold after controlling for the endogeneity between short-termism and both investor clientele and risk.