Companies that manage for the short term present their investors with more risk, according to a new working paper from Harvard Business School.
Short-Termism, Investor Clientele, and Firm Risk, by Francois Brochet, Maria Loumioti, and George Serafeim finds that for one thing, short-term firms have share prices that are more volatile than companies managing to a longer time horizon.
Firms focused on near-term results are characterized by “high absolute discretionary accruals, high likelihood of just beating analyst forecasts, reporting very small positive earnings, and just avoiding violating loan covenants.
“From Using conference call transcripts, we measure the time horizon that senior executives emphasize when they communicate with investors. We show that firms focusing more on the short-term have a more short-term oriented investor base. Moreover, we find that short-term oriented firms have higher stock price volatility, and that this effect is mitigated for firms with more long-term investors. We also find that short-term oriented firms have higher equity betas and as a result higher cost of capital. However, this result is not mitigated by the presence of long-term investors, consistent with these investors requiring a risk premium for holding the stock of short-term oriented firms. Overall, our evidence suggests that corporate short-termism is associated with greater risk and thus affects resource allocation.”