Evidence and Implications of Short-Termism in US Public Capital Markets: 1980-2013

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In this paper, we provide evidence of increasing short-termism in US equity capital markets over the period of 1980-2013. Using a ‘market discount factor’ estimated for publicly traded firms based on a capital asset pricing model, we show that US capital markets have become increasingly short-term oriented over the past thirty years. We corroborate this finding by estimating the impact of various investment behaviors and relevant ownership variables on our measure of short-termism, market discounting. We find that markets more heavily discount firms that have less financial slack, spend less on capital or R&D, or have greater analyst coverage. Consistent with prior research, we also find that public firms held by more transient institutional investors (i.e., investors that have significant turnovers of stocks) are more heavily discounted than their counterparts held by dedicated investors (i.e., investors that hold stocks for the long term). Further, firms that pay their executives proportionately more via long-term compensation packages are discounted less than firms with more short-term compensation. To examine the impact of short-term valuation on firm behavior, we also estimate the impact of short-termism on capital spending using changes in a firm’s institutional ownership type (e.g., a switch from transient to dedicated or vice versa) as an identification mechanism. We find that short-term market valuations are significantly negatively correlated with future capital investment. Overall, these results suggest that market discounting may proxy for firm short-termism. To our knowledge, this is the first paper to demonstrate economy-wide, firm-level evidence of increasing short-termism and the implications for investment behaviors by firms.