The short-termism trap: Catering to informed investors with limited horizons
Journal
Journal of Financial Economics
Subject
Finance
Publishing details
Authors / Editors
Dow J; Han J; Sangiorgi F
Biographies
Publication Year
2024
Abstract
Does the stock market exert short-term pressure on listed firms, do they respond, and is this response value reducing? We show that limited investor horizons indeed have those consequences, as follows. First, informative stock prices increase firm value; in our model, they reduce the agency cost of incentivizing managers. Second, short project maturity improves stock price informativeness by catering to informed investors with short horizons. Third, since informed trading capital is a scarce resource, attracting informed investors cannot increase an individual firm’s price informativeness in equilibrium: it simply destroys shareholder value. This “short-termism trap” can potentially destroy up to 100% of the benefits of stock market listing.
Available on ECCH
No
