Do Institutional Investors Prefer Near†Term Earnings over Long†Run Value?

This paper examines whether institutional investors exhibit preferences for near†term earnings over long†run value and whether such preferences have implications for firms' stock prices. First, I find that the level of ownership by institutions with short investment horizons (e.g., “transient†institutions) and by institutions held to stringent fiduciary standards (e.g., banks) is positively (negatively) associated with the amount of firm value in expected nearterm (long†term) earnings. This evidence raises the question of whether such institutions myopically price firms, overweighting short†term earnings potential and underweighting long†term earnings potential. Evidence of such myopic pricing would establish a link through which institutional investors could pressure managers into a short†term focus. The results provide no evidence that high levels of ownership by banks translate into myopic mispricing. However, high levels of transient ownership are associated with an over†(under†) weighting of near†term (long†term) expected earnings, and a trading strategy based on this finding generates significant abnormal returns. This finding supports the concerns that many corporate managers have about the adverse effects of an ownership base dominated by short†term†focused institutional investors.