Short Investment Horizons Research Articles

Technology rhetoric and institutional ownership

Abstract This article compares actual R&D spend with the managerial rhetoric around technology and innovation contained within corporate disclosures of US-listed firms. We find that, whilst actual R&D spend and patents do not entice institutional investors to increase their stock holdings, firms that espouse technology and innovation in their corporate disclosures are quite successful in drawing in short-term investors. We frame this investor behaviour within the economics of expectation literature. While managers are incentivised to draw in capital, short-horizon investors are less likely to exert due diligence and are rather persuaded by a technology narrative—that is, a ‘gold rush’ effect. This explains our finding that when there is a sudden downturn with stock price crashes, short-term investors rush to withdraw their money from firms that ‘talk tech’. Our findings have implications for managerial rewards systems, especially when these encourage managerial hype.

The Value of ETF Liquidity

Abstract We analyze how ETFs compete. Drawing on a new model and empirical analysis, we show that ETF secondary market liquidity plays a key role in determining fees. More liquid ETFs for a given index charge higher fees and attract short-horizon investors who are more sensitive to liquidity than to fees. Higher turnover from these investors sustains the ETF’s high liquidity, allowing the ETF to extract a rent through its fee, and creating a first-mover advantage. Liquidity segmentation through clientele effects generates welfare losses. Our findings resolve the apparent paradox that higher-fee ETFs not only survive but also flourish in equilibrium.

Investment horizon, slack resources, and firm performance: Evidence from privately held european firms

Short-termism in investment decisions often results in poor firm performance, though excessively long investments can also harm performance by reducing internal flexibility. This study investigated a quadratic, inverted U-shaped relationship between investment horizon and performance. Building on agency theory and resource-constraint arguments, we proposed that organizational slack moderates the relationship between investment horizon and firm performance. For short investment horizons, slack represented unused resources that could have been invested, thus leading to lower performance. For long investment horizons, slack helped cover unanticipated expenses and increased firm performance. We found empirical support for our theory in a large sample of privately held European firms in the utilities and retail trade industries.

Practical Analysis of Stock Market Under ESG

In today's era, climate change brought about by the greenhouse effect is gradually bringing more and more economic losses and natural disasters. In order to mitigate the negative impact of climate change, many countries have jointly formulated a 1.5°C climate scenario, which has brought a lot of impact on the global economy and industry development (Henderson et al., 2020). At the same time, my client commissioned me to build a portfolio that complies with the 1.5°C climate scenario, and the shares must be included in the S&P 500 Net Zero 2050 Climate Transition ESG Index as of 30/09/2022. The total portfolio is $100,000, and the benchmark designates the S&P 500 Net Zero 2050 Climate Transition ESG Index. Because the investment horizon is short and only six weeks, I chose semi-active management in my portfolio management process, and the rebalancing method was selected as percentage rebalancing. Finally, based on macro and industry analysis and relative valuation and technical analysis of the corresponding stocks, I selected ten stocks: Starbucks Corporation, Tesla, Inc., Amgen Inc., Cisco Systems, Inc., Eversource Energy, The Coca-Cola Company, and Expeditors International of Washington, Inc., Trans Digm Group Incorporated， Netflix, Inc., S&P Global Inc. I calculated their respective shares using the Markowitz model and bought and rebalanced, but unfortunately, my portfolio did not work as expected. The sector index fell by 4.87% in the week of the investment term, but my portfolio fell by 7.45% and performed poorly. Among them, the collapse of Tesla due to special events and my previous judgment of Tesla were greatly affected, and although its share price was only 9.94%, its share price fell by 33.74%. Although the late-stage rebalancing gave me hope for the better, the short investment horizon became a significant obstacle to the improvement of my portfolio.

Enduring relief or fleeting respite? Bitcoin as a hedge and safe haven for the US dollar

Can technology protect investors from extreme losses? This paper investigates the short- and long-run hedging and safe haven properties of Bitcoin for the US dollar over the period 2010–2023, incorporating the COVID-19-related market turmoil. Our findings reveal that (i) Bitcoin acts as a strong hedge for all US dollar currency pairs examined, (ii) Bitcoin functions as a weak safe haven for the US dollar at short investment horizons, as indicated by a limited relationship during acute negative price movements, (iii) Bitcoin, instead of acting as a safe haven may, instead, increase aggregate risk at long horizons during periods of extreme losses. The analysis, performed using a series of horizon-dependent econometric tests, provides evidence of some US dollar risk-reduction benefits from Bitcoin but limited potential for enduring relief from long-run extreme negative US dollar rate movements.

Corporate investment sensitivity to equity market misvaluation

PurposeThe purpose of this paper is to investigate the effect of equity market misvaluation on manager behavior. Using a sample of 535 French-listed over 2000–2018, the authors analyze whether corporate investment decision is sensitive to equity market overvaluation.Design/methodology/approachThe study adopts market-to-book (M/B) decomposition developed by Rhodes-Kropf and Viswanathan (2004, RKV) that proxies for market misvaluation at the firm and industry levels. The authors conducted a long-term performance analysis via a portfolio sorting procedure and a Carhart (1997) four-factor pricing model. The authors tested the relationship between equity misvaluation, corporate investment decisions and equity issuance. The authors ran several robustness tests.FindingsThe empirical results show that equity market misvaluation affects corporate investment positively as the stock price deviates further away from its fundamental. Based on market timing theory, the authors find that corporate investment occurs in periods of high valuation motivated by equity issuance to benefit from the low cost of capital. This effect is more prominent for financially constrained firms. Consistent with the catering channel, the authors find that the misvaluation-investment nexus is more pronounced in firms with short-horizon investors. By examining the stocks’ long-term performance of misvalued firms, via a sorting portfolio procedure, the authors find that undervalued firms outperform and generate higher abnormal returns (Jensen’s alpha) than overvalued firms, suggesting that mispricing-driven investment appear to be short-lived and lead to lower return in the long term.Practical implicationsCorporate decision-makers and governance structures should pay attention to the rationality of the corporate investment decision in the context of equity market misvaluation. Managers who focus on maximizing the stock market value in the short-run at the expense of its long-term performance must give preference to value-creating investment, not driven by an external mechanism such as equity market mispricing. More generally, investors and portfolio managers must take into account the market mispricing process in decision-making. Nonetheless, from the portfolio sorting perspective, decision-makers must act in terms of high governance quality to mitigate suboptimal investment due to stock market mispricing (Jensen, 2005). Finally, equity market overvaluation, leading managers to invest via equity financing in particular, should be a signal to attract investors’ attention to seize the window of opportunity and embark on a short-term portfolio strategy. Such a strategy promises high returns in the short term.Originality/valueThis paper investigates jointly two theoretical channels: equity market timing and catering. The authors propose for the analysis three components of the M/B decomposition to dissociate market misvaluation at the firm and industry level from the fundamental component of market value (growth). This procedure provides a better understanding of the role of firm and industry misvaluation in explaining corporate investments. The authors provide evidence of the equity market misvaluation via a portfolio sorting procedure and a Carhart (1997) four-factor pricing model. The authors examine the effect of misvaluation on both the investment and the financing decisions.

Are All Short-Term Institutional Investors Informed?

We examine whether being a hedge fund has any differential effect on the previously documented empirical relation between investment horizon and informativeness of institutional investors’ trades. We find that the positive and significant relation between short-term institutional demand and future stock returns exists only among hedge funds, while such relation does not exist for non–hedge fund institutions with short investment horizons. We also provide evidence that our results are not driven by (false) presumptions that hedge funds represent the majority of short-term institutional investors or that hedge fund demand constitute the lion’s share of the short-term institutional demand.

Determinants of CEO Investment Horizon. A Literature Review

This paper conducts a comprehensive literature review of the factors influencing the emergence of the CEO investment horizon problem – a preference for short-term investments over long-term ones. The root cause of this CEO issue, as in-dicated in existing literature, is often attributed to the CEO's personal risk attitude, shaped by factors like age, tenure, and cultural background.Numerous sources contributing to the short-term investment problem in public companies are described in the current academic literature. Prominent among these determinants are the challenges of quarterly reporting, the association of corporate performance with short-term metrics, market pressures, and the company's specific risk profile. A study by McKinsey & Company, focused on the short horizon problem, demonstrates that companies inclined toward short-term investments exhibit weaker fundamentals and performance. The consulting firm Ernst & Young has introduced the Long-term Orientation Index, offering a basis for cross-country comparison of decision horizons. In 2010, Antia and colleagues introduced a metric for measuring CEO decision horizons, which relies on CEO personal characteristics. Despite these efforts, a comprehensive literature review addressing the specificity of the CEO investment horizon problem and its dis-tinctions from the broader corporate investment horizon problem has been absent.This paper not only investigates the initial empirical exploration of the short investment horizon problem but also raises questions about its cross-country manifestations, its potential correlation with economic crises, and the relevant personal traits of CEOs for its study. Finally, the paper proposes various strategies to mitigate the CEO investment horizon problem within companies.

Portfolio diversification benefits before and during the times of COVID-19: evidence from USA

This paper investigates the portfolio diversification benefits for Islamic and conventional investors in the USA with its major trading partners (United Kingdom, Canada, China, Japan, Malaysia, and Turkey) before and during the COVID-19 crisis period. Using daily data from 2007 to 2020, we employ three relevant time-varying and timescale-dependent techniques, the continuous wavelet transform (CWT) analysis, the wavelet multiple correlation (WMC), and the wavelet multiple cross-correlation (WMCC). The findings suggest that conventional and Islamic US investors who invest with major trading partners may reap large diversification benefits for very short investment horizons (4–8), except for Sharia Malaysia index. However, they may not reap benefits for investment horizons of 8–16 and longer, except for China. In addition, COVID-19 crisis caused a poor diversification opportunity for US investors regardless of the regime they follow (conventional or Islamic). Moreover, the American industrial market depicts a state of impending perfect market integration. Finally, the UK and Canada seem to be the potential market leaders in different wavelet scales. These findings yield important policy implications.

A performance evaluation of portfolio insurance under the Black and Scholes framework: An application of the economic index of riskiness

The investment performance of an option-based portfolio insurance strategy is compared with a buy-and-hold strategy under the Black and Scholes framework. Under this setup, we can derive the return distributions for the portfolio insurance and buy-and-hold strategies. According to the economic performance measure, which generalizes the Sharpe measure, the portfolio insurance with no transaction costs almost outperforms buy-and-hold in all scenarios studied. Further, if the percent of principal protected is chosen optimally, the portfolio insurance is better than buy-and-hold. Although the portfolio insurance loses some ground for short investment horizons with transaction costs, the portfolio insurance performs relatively well for long investment horizons.

Are polluters shunned? A study on the institutional ownership and returns of polluter stocks

AbstractWe hypothesise that societal norms cause institutional investors to discriminate against polluters. Consistent with this hypothesis, we document relatively lower institutional ownership for the most polluting firms in the United States. Institutional discrimination against polluters increases over 1987–2018, in line with increasing environmental awareness. Institutions are primarily averse to investments in dioxin emitters. Institutions that prioritize portfolio performance are less sensitive to societal norms against polluters, as are institutions with shorter investment horizons and more aggressive trading strategies. Lastly, we test whether investor discrimination affects polluter equity valuations and creates systematic trading opportunities, but find no convincing evidence of a polluter return premium.

VOLATILITY FORECASTING AFTER REMOVING THE NOISE: DOES IT REALLY PAY OFF?

The analysis in this paper represents the first attempt to examine whether the forecasting performance of one of the GARCH models can be improved after removing the noise from the stock market returns. Doing the analysis on eight developed stock markets helps in providing reliable results that can be generalized to more stock markets. This paper then examines the ability of GARCH models to forecast stock return volatility under a range of statistical forecasts. We specifically employ the multiscale-based approach, namely the maximum overlap discrete wavelet transformation, to remove the noisy data from the return series. Based on related theoretical literature, we assume that noise trading makes the forecasting performance more misleading, especially at the short-term horizon. Our particular interest then is whether wavelet de-noising of the data before estimation affects the ability of the models to provide accurate forecasts at a short investment horizon. To de-noise the data, we use soft thresholding and Stein’s Unbiased Risk Estimator to obtain the decomposition level-based threshold limit. Our key results demonstrate that de-noising returns improves the accuracy of volatility forecasts regardless of whether we used statistical metrics or tests of equal predictive accuracy. Moreover, in terms of a particular volatility model, the asymmetric GARCH approach tends to be preferred although this result is not universal. Indeed, the central result from our analysis is that the process of de-noising is more important than the specific model.

Indirect Insider Trading

AbstractInsiders must disclose indirect trades made through accounts they control, including family, trust, retirement, and foundation accounts. Indirect trades through these accounts are more profitable than direct trades in the insider’s own account. They are also more likely to be made by “opportunistic” insiders who make nonroutine trades, or who trade profitably before earnings announcements, or who have a short investment horizon. These trades contain more predictive information about earnings surprises and large price changes, and they tend to be made by insiders at firms with high information asymmetry. Insiders also make fewer indirect trades following periods of intense regulatory scrutiny.

Sustainable Investment Preferences among Robo-Advisor Clients

The increasing role of individual investors in supporting the achievement of sustainable development goals through sustainable investment has gained growing interest from financial authorities and the research community. Digitalization in the financial sector, e.g., robo-advisors, enables lay-investors to make sustainable investments in a simple and convenient way. This study investigates whether investment-related attitudes and demographic profiles are related to robo-advisor clients’ sustainable investment choices. This paper describes an empirical study that uses a logistic regression model to investigate sustainable investment preferences at the individual investor level. Cross-sectional data consisting of 27,771 individual investors in Sweden, Norway, and Finland, who purchased investment products through a robo-advisor application, are used in this study. The results suggest that, concerning investment-related attitudes, robo-advisor clients with low-risk tolerance and a short investment horizon are more likely to choose to become sustainable investors. Furthermore, sustainable investments are preferred by robo-advisor clients who are less wealthy, female, and older.

Herding behavior in conventional cryptocurrency market, non-fungible tokens, and DeFi assets.

We examine the static and time-varying herding behavior in three cryptocurrency classes: ‘conventional’ cryptocurrencies, non-fungible tokens, and DeFi assets during the most recent cryptocurrency bubble of 2021. While static herding analysis failed to demonstrate any evidence of herding, the time-varying herding has been identified in conventional cryptocurrencies and DeFi assets for the short investment horizons. The herding asymmetry analysis reveals that herding is not evident in conventional cryptocurrencies and NFT during up/down market, high/low volatility days, and high/low trading days. We only find herding in DeFi assets during the low volatility days.

The term structure of mutual fund herding

AbstractThis paper investigates institutional herding behaviours in the U.S. Treasury market. We find that the level of herding is higher for bonds with a longer time to maturity and this pattern is significant only for buy herding, not sell herding. This term structure of herding is stronger for funds with a shorter investment horizon. These patterns remain strong for Treasury Inflation‐Protected Securities and for Treasuries with high coupon rates. Overall, our findings support investors' short‐termism as a channel for the term structure of herding and are inconsistent with other herding explanations, such as spurious herding, reputational concerns and information cascades.

Advertising Arbitrage

Abstract An arbitrageur with short investment horizon gains from accelerating price discovery by advertising his private information. However, advertising many assets may overload investors’ attention, reducing the number of informed traders per asset, and slowing price discovery. So the arbitrageur optimally concentrates advertising on just a few assets, unless his trades have significant price impact. The arbitrageur’s gain from advertising is increasing in the assets’ mispricing and in the precision of his private information, and is decreasing in its complexity. If several arbitrageurs have private information, inefficient equilibria can arise, where substantial mispricing persists or investors’ attention is overloaded.

Investor sentiment, R&D spending and firm performance

Prior literature indicates that the stock market is not simply a sideshow but also a factor that impacts corporate operations and decisions. This study examines the effect of a noise factor in the stock market, investor sentiment, on the relationship between the firm’s R&D spending and firm performance. Using a sample of publicly traded firms in the Chinese A-share market between 2006 and 2019, the study demonstrates that R&D spending generally enhances (reduces) firm performance during optimism (pessimism) periods. Concerning the channels through which investor sentiment impacts the R&D spending-firm performance relationship, market-timing effects indicate that firms that time equity issuance during optimism periods experience a positive R&D spending-firm performance relationship, whereas firms that initiate equity repurchase during pessimism periods have a negative R&D spending-firm performance relationship. For catering effects, when firms cater to short-horizon investors, R&D spending reduces firm performance. The results contribute to R&D and behavioural finance literature.

Does differential taxation of short-term relative to long-term capital gains affect long-term investment?

Pressure from short-horizon investors can hurt investments in innovative, long-run value-increasing projects. We explore the efficacy of a commonly proposed tax-based policy tool to mitigate this problem: the imposition of differentially greater taxes on short-term capital gains vis-à-vis long-term capital gains. Using a panel of 30 OECD countries in which seven countries exhibit 21 changes to differential capital gains taxation over 1991–2006, we find that rewarding longer-term ownership through lower taxes is associated with greater innovation. The evidence adds to our understanding of the real effects of taxation on investor trading and informs the debate on the use of capital gains taxes to address corporate myopia.

Asset price volatility and investment horizons: An experimental investigation

We study the effects of the investment horizon on asset price volatility using a Learning to Forecast laboratory experiment. We find that, for short investment horizons, participants coordinate on self-fulfilling trend-extrapolating predictions. Price deviations are then reinforced and amplified, possibly leading to large bubbles and crashes in asset prices. For longer investment horizons such bubbles do not emerge and price volatility tends to be lower. This is due to the fact that, for longer horizons, there is more dispersion in participants’ forecasts, and participants extrapolate trends in past prices to a lesser extent. We also show that, independent of the investment horizon, if the initial history of asset prices is already relatively stable before participants start their prediction task, price volatility remains small, with prices close to their fundamental values for the duration of the experiment.