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AbstractIn this study, we examine the differences in Investment, Employment, and Share repurchase sensitivities to uncertainty between firms with varying investor horizons. We test for these effects using two macro‐based uncertainty measures (Baker et al., 2016; Ahir et al., 2018). The results show that in uncertainty times, greater short‐term investor ownership is associated with less investment and hiring, and more net share buybacks. These findings are consistent with the preference of short‐horizon investors of seeking to divest in the near future, thus, wanting to maximize current stock prices.

The rise in quarterly capitalism in corporate America—increased pressure to meet quarterly earnings predictions and cater to shareholder preferences for short-term returns—has gained significant coverage in the business world and popular press in recent years. Increasingly, popular opinion suggests that firms bow to shareholder pressures, taking steps to smooth earnings and boost share prices in the short-term; firms do so by cutting Research and Development (R&D) investment, engaging in extensive cost-cutting, or increasing dividends and share buybacks. Recent estimates at the industry level show that investor discount rates have increased in recent years, supporting the notion that shorttermism is on the rise. However, we do not have evidence at the firm level documenting whether and how market discounting is changing over time or how such discounting differs between firms according to firm behavior and characteristics. A recent article by Sampson and Shi estimates market discounting at the firm level as a proxy for investor time horizons, which not only reveals how time horizons have changed but also how they vary between firms. Below, we discuss some observations on changing investor behavior, followed by a review of the evidence presented by Sampson and Shi. We conclude with a brief evaluation of why increased market discounting suggests that investor time horizons are shortening as well as what this means for firms.

Do investor time horizons lead to inefficient business conduct in the real economy? An extensive finance literature analyzes whether particular practices (e.g., high frequency trading and stock buybacks) lead firms to operate with inefficiently myopic investment horizons, and an extensive legal literature considers the appropriateness of policy interventions. This Article joins those debates by charting the space of possibilities: what might be the causes of problematic time horizons? What solutions are available? One implication of this analysis is that there may be unexplored market-based solutions located on the liability side of investors' balance sheets. This Article also argues that we should avoid characterizing the time horizon problem in a manner that subtly endorses some contested perspective on the appropriate time horizon. Rather than investigating excessive "short-termism" or "long-termism," our starting point should be the broader category of "wrong-termism."