Real economy effects of short-term equity ownership

John Thanassoulis, Babak Somekh

Research output: Contribution to journalArticle (Academic Journal)peer-review

Abstract

Investor time horizon varies by company, industry and economic system. In this article we explore the importance of this variation by studying the impact of shareholder time horizon on the investment decisions of the firms they own, and externalities on the wider market. We demonstrate theoretically that short-term shareholders cause Boards to care about the path of the stock price, rationalising firms’ pursuit of investments for signalling reasons at the expense of long-term value. We demonstrate that short-termism has spillover effects, leading to higher costs of equity capital; bubbles in the price of input assets; and predictable excess returns. We build testable cross-country hypotheses and evaluate these using existing evidence coupled with a new dataset on owner duration of US and Germanic firms.
Original languageEnglish
Pages (from-to)233
Number of pages254
JournalJournal of International Business Studies
Volume47
Issue number2
Early online date17 Dec 2015
DOIs
Publication statusPublished - Feb 2016

Keywords

  • Short-term shareholders
  • Bubbles
  • Signalling

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