The short-termism trap: Catering to informed investors with limited horizons

James Dow, Jungsuk Han and Francesco Sangiorgi

Journal of Financial Economics, 2024, vol. 159, issue C

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.

Keywords: Informational externality; Price informativeness; Myopia; Agency cost; Managerial compensation; Race to the bottom (search for similar items in EconPapers)
JEL-codes: G14 G32 G38 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:159:y:2024:i:c:s0304405x24001077

DOI: 10.1016/j.jfineco.2024.103884

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