According to the short-termism thesis, public companies in the United States are excessively focused on increasing short-term stock prices and are therefore foregoing valuable long-term investment. We evaluate the evidence to support the short-termism thesis including the role of shareholder activism and stock buybacks by public companies.
The first section of the report focuses on the empirical literature addressing whether short-termism exists, the potential causes of short-termism, and the economic effects of short-termism, if any. We find that U.S. public companies engage in similar amounts of long-term investment as private companies and public companies’ long-term investment has increased substantially in recent years. We therefore do not find support for the contention that short-termism is a problem in U.S. markets.
We then consider the rise of shareholder activism, which refers to tactics employed by shareholders of a company that are aimed at increasing the value of their stake in the company. Shareholder activism is often identified as a cause of short-termism as presumably these shareholders are focused on short-term returns. This section focuses primarily on the empirical literature related to share-holder activism by hedge funds, which typically includes aggressive tactics, such as proxy fights aimed at replacing a company’s board of directors. Overall, we find that hedge fund activism confers positive benefits on firms in the short run and the evidence regarding activism’s long-term effects is mixed.
The third section of the report considers the rise in stock buybacks by public companies. A stock buyback is a firm repurchasing its own previously issued stock from shareholders and is a method, along with dividends, for firms to redistribute excess capital back to shareholders. Critics of stock buybacks argue that the recent rise in stock buybacks is a symptom of short-termism—an attempt by companies to boost their stock prices in the near term, while foregoing long-term investment. How-ever, we describe a number of motivating factors for stock buybacks that are not short-term, including increased flexibility of buybacks as compared to dividends and lowering a firm’s cost of capital. We also review empirical literature finding that stock buybacks often do not increase short-term stock prices and that long-term investment is particularly strong at companies engaged in share buybacks.
The final section of the report sets forth the Committee’s policy recommendations to enhance long-term investment in U.S. public markets. First, we recommend that U.S. public companies weigh carefully the costs and benefits of issuing quarterly earnings guidance and consider ending the practice if they determine that such guidance is discouraging long-term investment. Second, the SEC should issue guidance clarifying that, when a company’s Board of Directors authorizes a stock re-purchase program, the company should disclose on a timely basis certain material elements of the program, including its approximate intended duration and the maximum approved repurchase amount (for example, as a total number of shares or a total dollar value). Public companies should disclose these material elements within five business days of the authorization of the repurchase plan, through a press release or other Reg FD-compliant method that ensures broad public dissemination.
The full report can be found here.