Investor short-termism and real investment

Dominik M. Rösch; Avanidhar Subrahmanyam; Mathijs A. van Dijk

doi:10.1016/j.finmar.2021.100645

Investor short-termism and real investment

Dominik M. Rösch, Avanidhar Subrahmanyam, Mathijs A. van Dijk^*

^*Corresponding author for this work

Department of Finance

Research output: Contribution to journal › Article › Academic › peer-review

1 Citation (Scopus)

Abstract

Short-term traders could affect the informativeness of stock prices about long-run fundamentals. Less (more) short-termism may thus induce managers to rely more (less) on stock prices in real investment decisions. Supporting this notion, we show that the investment-to-price sensitivity is inversely related to two short-termism proxies (controlling for firm size): institutional churn and liquidity. We confirm this finding using decimalization and an increase in mutual fund disclosure frequency as exogenous shocks to short-termism. Furthermore, short-termism is associated with an increased likelihood of voluntary capital expenditure forecasts by managers, suggesting a greater tendency to solicit market feedback when short-termism is high.

Original language	English
Article number	100645
Journal	Journal of Financial Markets
Volume	59
DOIs	https://doi.org/10.1016/j.finmar.2021.100645
Publication status	Published - Jun 2022

Bibliographical note

JEL classification: G14, G23, G31
Funding Information:
We are grateful to two anonymous referees and Paolo Pasquariello (the editor) for insightful and constructive feedback. We thank Feng (Jack) Jiang for data on exogenous brokerage closures, and OneMarket Data for the use of their OneTick software. This work is supported in part by NSF ACI-1541215 .

Publisher Copyright:
© 2021 The Authors

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10.1016/j.finmar.2021.100645

Cite this

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title = "Investor short-termism and real investment",

abstract = "Short-term traders could affect the informativeness of stock prices about long-run fundamentals. Less (more) short-termism may thus induce managers to rely more (less) on stock prices in real investment decisions. Supporting this notion, we show that the investment-to-price sensitivity is inversely related to two short-termism proxies (controlling for firm size): institutional churn and liquidity. We confirm this finding using decimalization and an increase in mutual fund disclosure frequency as exogenous shocks to short-termism. Furthermore, short-termism is associated with an increased likelihood of voluntary capital expenditure forecasts by managers, suggesting a greater tendency to solicit market feedback when short-termism is high.",

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Investor short-termism and real investment

Abstract

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