Short‐Term Expectations in Listed Firms: The Effects Of Different Owner Types

Abstract

We report empirical evidence regarding the disciplining role of different institutional and other owners in reducing managerial myopia. Using data from a large Nordic survey, we find that companies to a reasonably high degree feel that external pressure for a good result in the short-term generates conflict with the company's long-term goals. We test for the effect of several ownership types, and find that especially in firms with a large private equity owner the perceived pressure for short-term actions is reduced. In addition, we find a negative association between firm profitability and short-term pressure. We also find support for a behavioral characteristic: younger managers feel significantly more pressure. Firms subject to higher pressure undertake more actions to accommodate that pressure. Again, the impact of especially a large private equity owner is beneficial because such firms undertake significantly less often actions that are likely to destroy value, such as deprioritizing their long-term investments or R&D.

Investor activism strategies of private equity firms: evidence from continental Europe

“…The study did not identify that the target company’s stock performance improves after the PE investor uses shareholder activism strategy, but the findings suggest that short-term operational performance results are poorer as consequences of shareholder activism by PE firms. PE investors tend to focus on the target’s long-term performance; therefore, they will likely increase capital investments, rather than divest assets to demonstrate quick improvement in operational performance (Brunzell et al , 2015).…”

“…Mietzner and Schweizer (2008) consider it puzzling that, while PE firms' targets demonstrate positive long-term performance, their short-term operational results appear to fall. It could be explained by the fact that in contrast to other institutional investors, PE firms are perceived to impose low short-term pressure on their target firms' accounting indicators, thus tending to increase capital investments, rather than significantly divest assets (Brunzell et al, 2015). Badunenko et al (2010) also found that if a PE investor held its ownership in the target firm for less than one year, the investee performed worse than a company without PE shareholders.…”

Private equity investment tenure and financial performance: Evidence from European PIPE transactions

“…cash flow, as one of important operational performance measures, could be expected to rise, while the rate of the growth might increase for some period after the investment is made, when PE investor attempts to take all the efforts to improve the target performance. the authors in [Brunzell, liljeblom, Vaihekoski, 2015] report the substantial increase in capital investments upon the acquisition of the ownership stake in a target company. Over time, the growth rate could decrease or remain stable.…”

On business short-termism: the case of CVS’s discontinuing tobacco sales

“…The pressure apparently varies by country; Segelod (2000) finds that US executives perceive more pressure for short term stock performance than their Swedish counterparts. A firm’s ownership can mitigate or exacerbate short-termism; Dill et al (2016) find that foreign ownership increases the emphasis on short term profits, while Brunzell et al (2015) determine that large private equity ownership stakes reduce short-term performance pressure. Managers may also play a role – Brunzell et al (2015) find young managers feel more short-term performance pressure and Palley (1997) posits that managerial turnover contributes to short-termism.…”

“…A firm’s ownership can mitigate or exacerbate short-termism; Dill et al (2016) find that foreign ownership increases the emphasis on short term profits, while Brunzell et al (2015) determine that large private equity ownership stakes reduce short-term performance pressure. Managers may also play a role – Brunzell et al (2015) find young managers feel more short-term performance pressure and Palley (1997) posits that managerial turnover contributes to short-termism. To date, however, most short-termism research deals with managerial perceptions rather than company behavior, though Miles’ (1993) finding that “discount rates implicit in market valuations applied to cash flows which accrue in the longer term are too high” and Demirag’s (1996) report that short-term financial pressure is associated with reduced R&D spending and patenting rates are notable exceptions.…”