The Effect of Investor Short-Termism on the Capital Demand of European Listed Firms

Zoltán Schepp (), József Ulbert () and Ákos Tóth-Pajor ()
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Zoltán Schepp: University of Pécs
József Ulbert: University of Pécs
Ákos Tóth-Pajor: University of Pécs

Financial and Economic Review, 2020, vol. 19, issue 2, 88-106

Abstract: The study examines the relationship between investors’ intertemporal preferences and capital demand in European listed firms’ practices. It seeks to find out how investor short-termism influenced European companies’ capital demand in 2004– 2016. The analysis of the link between the cost of equity and businesses’ capital demand reveals the effects of macro-level shocks such as the recession, the change in the interest rate environment and the shifting equity risk premium on capital markets. To answer the question that our research focused on, we estimated the implicit intertemporal discount surplus typical of the companies under review and thus determined the discount rate in excess of the cost of capital that describes investors’ intertemporal preferences. We then explored the relationship between the cost of equity and capital demand using regression models. We found that in the practices of European listed firms, the decrease in capital demand and the resulting restrictions on investment are attributable to growth in the intertemporal discount surplus. If investors prioritise their short-term interests on the capital markets and companies adapt to investors’ intertemporal preferences, long-run shareholder value accumulation is undermined. Additionally, and in connection with the above, growth in the intertemporal discount surplus can also delay the effects of monetary easing.

Keywords: capital demand; investment decisions; intertemporal preferences; intertemporal discount surplus; hyperbolic discounting; investor short-termism (search for similar items in EconPapers)
JEL-codes: E22 E52 G31 (search for similar items in EconPapers)
Date: 2020
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