Short-termism

Graham, Harvey, and Rajgopal (2005): “The Economic Implications of Corporate Financial Reporting”

Journal of Accounting and Economics

• 80% of CFOs would cut R&D, advertising, and maintenance to meet a quarterly earnings target

Roe (2018): “Stock Market Short-Termism’s Impact”

• If markets were as short-termist as commonly portrayed, we should see sharply declining investment in stock-market-dependent companies (e.g. the US); buybacks starving firms of cash; declines in R&D; and the stock market being unwilling to support innovative, long-term firms.
• The evidence is strongly inconsistent with these predictions

Asker, Farre-Mensa, and Ljungqvist (2015): “Corporate investment and stock market listing: A puzzle?"

Review of Financial Studies

• Compares the investment behaviour of public firms and similar private firms (e.g. those of similar size)
• Finds that public firms invest significantly less, and are less responsive to changes in investment opportunities. These effects are strongest in industries where quarterly earnings announcements have large effects on the stock price. Where stock prices are unresponsive to earnings news, there is no difference in the behaviour of public and private firms

Maksimovic, Phillips, and Yang (2019): “Do public firms respond to investment opportunities more than private firms? The impact of initial firm quality”

• The above results may be driven by the fact that public firms and private firms are inherently incomparable
• Finds that firms that are higher-quality (larger, faster-growing) at birth (a) remain larger later on and (b) are more likely to subsequently go public. Thus, comparing public and private firms of the same size compares low-quality public firms with high-quality private firms
• After controlling for these differences, public firms are more responsive to investment opportunities than private firms