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Short-Term Shareholders, Bubbles, And CEO Myopia

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  • John Thanassoulis

Abstract

This paper analyses the real economy effects of firms having some shareholders with a short investment horizon on their shareholder register.� Short-term shareholders cause management to be concerned with the path of the share price as well as its ultimate value.� Such shareholders in an economy lead to bubbles in the prices of key inputs, to the misallocation of firms to risky business models, and to increased costs of capital.� For individual firms short-term shareholders induce the Board to reduce deferred incentives in CEO pay prompting CEO myopia and reduced investments in the long-run capabilities of the firm.

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Bibliographic Info

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 663.

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Date of creation: 04 Jul 2013
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Handle: RePEc:oxf:wpaper:663

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Keywords: Investor time-horrizons; bubbles; CEO compensation; cost of capital; short-termism; bonuses; shareholder register;

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  1. Kenneth A. Froot & Andre F. Perold & Jeremy C. Stein, 1992. "Shareholder Trading Practices And Corporate Investment Horizons," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(2), pages 42-58.
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  3. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
  4. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
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  7. John Thanassoulis, 2013. "Industry Structure, Executive Pay, and Short-Termism," Management Science, INFORMS, vol. 59(2), pages 402-419, June.
  8. Alex Edmans & Xavier Gabaix & Tomasz Sadzik & Yuliy Sannikov, 2012. "Dynamic CEO Compensation," Journal of Finance, American Finance Association, vol. 67(5), pages 1603-1647, October.
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  13. Gaspar, Jose-Miguel & Massa, Massimo & Matos, Pedro, 2005. "Shareholder investment horizons and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 76(1), pages 135-165, April.
  14. Bebchuk, Lucian Arye & Stole, Lars A, 1993. " Do Short-Term Objectives Lead to Under- or Overinvestment in Long-Term Projects?," Journal of Finance, American Finance Association, vol. 48(2), pages 719-29, June.
  15. Dong, Min & Ozkan, Aydin, 2008. "Institutional investors and director pay: An empirical study of UK companies," Journal of Multinational Financial Management, Elsevier, vol. 18(1), pages 16-29, February.
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  17. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  18. Allen, Franklin & Gorton, Gary, 1993. "Churning Bubbles," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 813-36, October.
  19. Chen, Xia & Harford, Jarrad & Li, Kai, 2007. "Monitoring: Which institutions matter?," Journal of Financial Economics, Elsevier, vol. 86(2), pages 279-305, November.
  20. Christopher Polk & Paola Sapienza, 2009. "The Stock Market and Corporate Investment: A Test of Catering Theory," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 187-217, January.
  21. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
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