• Chief executives serve increasingly longer terms, not shorter ones as widely held: bosses departing in 2015 had an average of 11 years in office for S&P 500 firms, the highest figure for 13 years. • Activist hedge funds are not leveraging the market by large block holdings; they own less than 1% of
the stock market.
• Trading of the average share occurs many times because of high-frequency computerised traders. But their churning masks the sharp rise of passive funds, which already own 13% of the market and which hold shares indefinitely.
• Incentivizing CEOs through pay for performance or stock options has increased from $2.9 million in 1992 to around $9.0 million in 2011 (Murphy, 2012). And the use of incentives has been associated with increased market returns. However, this masks the long-term nature of incentives. CEOs will not get the profits from these unless they stick around and improve the company. Further, if the reporting period is changed from a year or less to a 10-year cumulative basis to report shareholder returns, paying CEOs more does not lead to companies performing better in the stock market (Marshall and Eling-Lee, 2016).
• Quarterly capitalism (managers putting their efforts towards the next reporting date) is blamed for short-termism. But it also depends on the industry the company is in, the kind of investors they attract based on their time horizon, and the narrative managers tell about their company. Many long-term investors will stay in for the long-haul and not be swayed by short-term figures.
Apparently myopic markets often look far into the future
• The bond market lends to the government for 30 years for an interest rate of just 3%.
• Equity investors place enormous values on firms that will not make serious profits for many years. That includes through new offerings (IPOs), venture capital funds, and directly for companies that have a convincing narrative. Amazon is the world’s fifth-most valuable firm, with a colossal $400bn market capitalisation. About 75% of that value is justified by profits where the expectations is they are to be made a decade or more from now. It is probably the biggest bet in history on a company’s long-term prospects. But Jeff Bezos, its CEO, annually reiterates the company’s long-term approach.
Companies are not investing at dramatically low levels
• Figures suggesting hoarding of capital to fund excessive buy-backs are misleading. Buy-backs are so high because profits are abnormally high, which in turn may reflect the rising level of concentration in most industries. Were firms to try to invest all their surplus funds, they would need to almost double investment to a reckless 17% of sales. If Ford invested all its record cash flows, based on 2016 figures, it would double its plant in 30 months, an act of insanity in the car business.
• Investment - capital spending plus research and development - is 9% of sales for S&P 500 firms, in line with the 25-year average (excluding financial companies).
• For the economy, private-sector capital spending, excluding housing, is at 12% of GDP, equal to the average since 1945.
Main source adapted from The Economist, 2017
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buybacks not as a short-term market pressure but rather a utilization of markets by managers, albeit in the short-term.
Furthermore, a long-term view, not a short-term one, is supported by high – or volatile – stock prices, otherwise there would be no excess value within a share price over and above a company’s known asset value (Abarbanell and Bernard, 2000; Rappaport and Mauboussin, 2001). Similarly, PE ratios when historically high mean prices are forward-looking (see eg Kaplan, 2017, p22). Indeed, despite high valuations varieties of companies come into being all the time with little in the near term to recommend them. Amazon is an example, where for many years it was in this position, including with debt and a lack of any positive returns. These are the so-called ‘unicorn’ companies – often the focus of IPOs in such areas as biotech - where, rather than short-term gains, investors are thinking about potential future, long-term gains, when they make their buying decision (Mauboussin and Callahan, 2015). So why do critics from politics, academia and the media propound the idea that the
market is the source of short-term pressure on companies - and that this is a pressing
danger? Part of the answer may have to do with cognitive bias. First is hindsight bias, where people under pressure may look to past times as being better than the present, which they see as fraught with economic perils. Yet they forget there were pessimists in the past too and markets and businesses survived (see eg Kaplan in Frick, 2017). The second example is
highlighted by Edmans (2017) who points out that ‘In the current political climate, many people see companies as evil, and are very willing to accept evidence that supports this view and reject evidence that contradicts it’. This is, in other words, a form of confirmation bias. Yet overall, ‘…short-termers ignore a lot of evidence that goes against their position’ (Kaplan 2017). Hence, the pressure on managers to be short-termist. And with slim
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3.3.3 Sorting behaviour: Research suggests companies and investors do not all behave the
same with respect to time horizon. Public companies, for example, are less likely than private companies to invest more in the short term. An outcome is that public companies are more near-term profit seeking than private companies (Bergstresser and Philippon, 2006), and attracting particular kinds of investors with different time preferences accordingly. In fact, a certain amount of winnowing is involved, and where a matching eventually occurs between companies with investors. Observing corporate behaviour without
appreciating this time-related process can lead to a misperception about short-termist market pressures dominating. Evidence for this market-matching behaviour comes from research on voluntary disclosure horizons in conference calls by Brochet et al (2012, 2015). Their work demonstrated how short-term orientated investors appeared more attracted to companies with a greater focus in their conference calls on the short-term; while long-term oriented investors appeared more attracted to companies with a greater focus on the long-term. Like attracts like it appears; or as Buffet (1979) wrote, ‘In large part, companies obtain the shareholder constituency that they seek and deserve.’ Yet a mechanism appears in place where long-term investors incline towards companies having: longer time horizons for higher discretionary spending on R&D and advertising; less issuing of guidance1; and less risk- taking. Conversely, short-term oriented investors incline towards companies associated with poorer use of resources; more myopic choices, and higher risk-taking (Brochet et al, 2015).
But these apparent differences may obscure a certain market balance achieved between short and long-term institutional investment, as Brochet et al (2015) indicate. The sorting process, through investor attraction to companies with either short or long-term orientation,
1This is a comparable finding stressed in Bushee, 2004, on quasi-investors; see also Chen et al, 2011 who document an increase in long-term investor holdings after stopping guidance completely
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