The Power of Long-Term Investors
Highlights from the 2015 Northern Finance Association Conference
BY Caroline Cakebread | September 9, 2015
More and more, public companies have been accused of making short-term decisions at the expense of a longer-term vision. However, as executives and investors alike decry the pressure to focus on quarterly profits rather than long-term gains little work has been done to actually quantify the impact of long-term investors on a company’s fortunes. New research, however, aims to fill the gap by asking whether or not long-term investors actually improve corporate decision-making. The paper, “Do Long-Term Investors Improve Corporate Decision Making?,” was written by Jarrad Harford, Ambrus Keskes, and Sattar Mansi is to be presented at the 2015 Northern Finance Association Conference (September 18-20).
The authors challenge the theory that long-term investors are beneficial to publicly traded companies by asking whether or not such investors improve corporate behaviour and – importantly – whether their influence on managerial decision making improves returns to shareholders of the firm. The researchers based their paper on an average of three thousand firms annually over close to 30 years.
The findings are interesting and show they long-term investors restrain corporate misbehaviour and strengthen internal governance. The presence of long-term investors also leads to a decrease in various types of investment activity as well as external financing. However, they do lead to an increase in payouts to shareholders. That means shareholders earn higher returns on their investment as a result of both higher profitability and lower risk, write the authors. As they conclude, long-term investors rein in bad behaviour and boost shareholder value.
You can view the entire paper here.