In the corporate governance debate, there’s perhaps no more pejorative term than “short-termism.” But an “Institutional Investor” article cites a recent study that says short-term investors may not be so bad after all:
Short-term investors are widely seen as bad for the companies they invest in, because they are likely to focus on immediate changes in stock value — potentially at the expense of the company’s long-term profitability. But new research suggests that there may be times when a short-term focus can actually help companies perform better over the long run. The study, expected to be published in the scholarly journal Management Science, found that companies with more short-horizon investors — who trade stocks regularly — adapted more quickly when their competitive environments changed “radically.”
“Under these circumstances, firms and economies with disproportionately more short-term investors may appear more dynamic and avoid stagnation, indicating that short-horizon investors perform an important function in the economy,” wrote authors Mariassunta Giannetti (Stockholm School of Economics) and Xiaoyun Yu (Indiana University).
To put this a little more bluntly than the authors do, the study suggests that those who believe that short-term investors light a fire under corporate management may well have a point.
-John Jenkins, TheCorporateCounsel.net September 9, 2020
