Study On How Investment Horizon Impacts Corporate Decision-Making

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Nearly all companies describe their ideal shareholder as having a long-term investment horizon, but in the real world, about half of companies’ shareholder base has a short-or medium-term horizon. As a result, most companies see significant upside to managing their shareholder base, and senior leaders spend considerable time meeting with current and prospective investors.

“More than three-quarters of companies in our survey see significant stock market benefits from managing their shareholder base,” says Professor Anne Beyer, Associate Professor of Accounting at the Stanford Graduate School of Business and co-author of the study.

“Companies believe that if they can identify and attract the right shareholder base, they will be able to increase the price of their stock and decrease its volatility.”

“Companies want long-term shareholders in particular because it allows them to implement their corporate strategy and make long-term investments without the distraction and short-term performance pressures that come from active traders,” says Professor David F. Larcker, James Irvin Miller Professor of Accounting and Senior Faculty at the Rock Center for Corporate Governance. “We find that the investor relations department can create a real competitive advantage by attracting a shareholder base with the same long-term investment horizon as the company.”

The study, conducted in partnership with the National Investor Relations Institute (NIRI), surveyed 138 investor relations professionals at North American companies about the investment horizon and expectations of their shareholder base and the impact that these expectations have on corporate decision-making.

Companies believe that short-term investors distract from strategic decisions

Nearly two-thirds of companies (65%) agree or strongly agree that a company whose shareholder base is dominated by short-term investors cannot focus on strategic decisions because of a focus on short-term results. Just over half (51%) believe that short-term investors lead a company to focus on cost cutting. The majority of companies (57%) agree or strongly agree that a company whose shareholder base is dominated by short-term investors will have reduced market value and/or reduced long-term growth.

However, being able to make strategic acquisitions is generally not a concern even if the shareholder base is dominated by investors with short-term investment horizons (only 26% of companies indicate strategic acquisitions as an area of concern).

“Investors with short-term horizons pay close attention not only to stock prices in the near term but also the companies’ short-term performance as reported in their financial statements. If short-term projects yield lower returns on investment than long-term projects as it is often the case, a shareholder base dominated by short-term investors can become a real challenge for companies,” says Professor Larcker.

The ideal shareholder base consists of long-term investors – still “long-term” is not that long

Companies are most likely to describe their ideal shareholder as having a “long-term investment horizon,” with the vast majority (92%) listing this quality. Still, a “long-term” investment horizon doesn’t have to be that long. On average, companies estimate the investment horizon of a typical long-term investor to be at least 2.8 years. By contrast, short-term investors are seen as having an investment horizon of 7 months or less.

Not surprisingly, most companies agree or strongly agree that desirable shareholders are not activists (87%). About two-thirds of companies don’t want a concentration of ownership and do pay attention to the price at which an investor acquired a company’s shares. The geographical location in which the shareholder resides plays virtually no role with only 7% of the companies deeming this an important shareholder characteristic.

Companies want to increase ownership of management, employees and pension funds

Top management and corporate directors are seen as having the longest investment horizon among major shareholder groups, with 93% and 92% of companies describing their investment horizon as long-term or somewhat long-term, respectively. Among other major shareholder groups, pension funds are seen as having the longest investment horizon.

Investment Horizon: Composition of shareholder base

1. What is the investment horizon of a typical investor (in years)?

2. How important are the following to a long-term investor?

investment horizon

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