How bad a problem is “quarterly capitalism”?

We’re going to be hearing more about this topic I suspect, so let’s start by looking at some of the evidence.  For now I’ll turn the microphone over to Xuemin (Sterling) Yan and Zhe Zhang (pdf):

We show that the positive relation between institutional ownership and future stock returns documented in Gompers and Metrick (2001) is driven by short-term institutions. Furthermore, short-term institutions’ trading forecasts future stock returns. This predictability does not reverse in the long run and is stronger for small and growth stocks. Short-term institutions’ trading is also positively related to future earnings surprises. By contrast, long-term institutions’ trading does not forecast future returns, nor is it related to future earnings news. Our results are consistent with the view that short-term institutions are better informed and they trade actively to exploit their informational advantage.

And here is from the Geoff Warren 2014 survey (pdf):

The link between investor short-termism and corporate myopia is not clear cut – While there is some evidence in support of such a link, it is by no mean compelling. Laverty (1996) examines arguments on the existence of short-termism, and points out there is: (1) no clear evidence of flawed short-term oriented management practices; (2) only mixed evidence that stock market myopia encourages corporate short-termism, noting for instance findings of positive stock market reactions to long-term investment by some papers; and, (3) an absence of empirical support for the supposed influence of ‘fluid capital’ on corporate behaviour.

Results of a survey of company management by Marston and Craven (1998) also question the extent to which institutional investors are short-term in focus. While their survey uncovers a perception that sell-side (broking) analysts are focused on the short-term, company management did not consider this the case for buy-side analysts and fund managers. When asked if the buy-side was too concerned with short-term profit opportunities, only 21% agreed while 53% disagreed.

There is more evidence to consider, but I will start by introducing the idea that the standard anti-publicly traded company tropes are not self-evidently true, or at the very least we do not know them to be true.


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