Journal of Financial Stability 12 (2014) 16–25

Contents lists available at ScienceDirect

Journal of Financial Stability

journal homepage: www.elsevier.com/locate/jfstabil

Measuring the costs of short-termism

Richard Davies a , Andrew G. Haldane b , Mette Nielsen b , Silvia Pezzini b,∗
a
The Economist, United Kingdom
b
Bank of England, United Kingdom

a r t i c l e i n f o a b s t r a c t

Article history: A potential cost of modern capital markets is short-termism, with agents in the financial intermediation
Received 5 October 2012 chain weighing near-term outcomes too heavily at the expense of longer-term opportunities and thus
Received in revised form 9 July 2013 forgoing valuable investment projects and potential output. This paper sets out an analytical framework
Accepted 9 July 2013
and empirical estimates of the potential costs of short-termism arising from distortions to the cost of
Available online 1 August 2013
capital and investment intentions.
© 2013 Bank of England.. Published by Elsevier B.V. All rights reserved.
Keywords:
Financial economics
Investment

1. Introduction
Modern capital markets come with costs. As recent events have
shown, the most visible and violent of those costs are experienced
at times of financial crisis. These costs, for example in foregone out-
put, have been extensively studied (for example, Hoggarth et al.,
2002). But there is a second potential cost of modern capital mar-
kets – the costs of short-termism.
Although it has no off-the-shelf definition, short-termism is
generally taken to refer to the tendency of agents in the financial
intermediation chain to weight too heavily near-term outcomes at
the expense of longer-term opportunities (Haldane, 2011). This has
opportunity costs, for example in foregone investment projects and
hence future output.
Unlike crises these opportunity costs are neither violent nor vis-
ible. Rather, they are silent and invisible. Perhaps for that reason,
there have been very few attempts to capture the potential costs
of short-termism in quantitative terms. Nevertheless, existing sur-
vey evidence is strongly suggestive of short-termist tendencies in
modern capital markets.
For example, a 2004 MORI survey of members of the Invest-
ment Managers Association (IMA) and the National Association
of Pension Funds (NAPF) found a third and two-thirds of mem-
bers respectively believed their investment mandates encouraged
short-termism. Poterba and Summers (1995) surveyed Chief Exec-
utive Officers (CEOs) at Fortune-1000 firms and found that the
discount rates applied to future cash-flows were around 12%, much
higher than either equity holders’ average rate of return or the
return on debt. Based on a survey of over 400 executives, Graham
et al. (2005) found over 75% would give up a NPV-positive project
to smooth earnings.
Perhaps reflecting that, short-termism has a rising public pol-
icy profile. In the UK, a government review of UK equity markets
recently found short-termism in equity markets caused by mis-
aligned incentives in the investment chain.1 In America, both
business groups and think-tanks are concerned about investor
myopia.2 And the European Commission, Financial Stability Board
and Group of Thirty have all recently expressed concerns about
factors hindering long-term investment strategies, including short-
termism.3 Given its rising public policy profile, the relative dearth
of quantitative evidence on the scale and importance of short-
termism is an important gap. This paper aims to help fill some of
that gap.
We make three specific contributions to the literature. First,
we show that if investors discount future returns excessively,
a manager seeking to maximise the value of the firm will pri-
oritise near-term cash-flows over distant ones. Specifically, the
manager will prioritise dividend distributions over reinvestment,
causing a violation of the dividend irrelevance hypothesis. Sec-
ond, we provide evidence that investors discount future returns
excessively. Our estimates of investor discount rates in the US

1
See Kay (2012); industry responses to the report varied considerably see
Financial Times (2012).
∗ Corresponding author at: Bank of England, Threadneedle Street, London EC2R 2
See Business Roundtable (2006) and Aspen Institute (2009, 2010).
3
8AH, United Kingdom. Tel.: +44 2076014663. See European Commission (2011), Financial Stability Board (2013) and G30
E-mail address: silvia.pezzini@bankofengland.co.uk (S. Pezzini). Working Group (2013).

1572-3089/$ – see front matter © 2013 Bank of England.. Published by Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.jfs.2013.07.002
 R. Davies et al. / Journal of Financial Stability 12 (2014) 16–25
and UK suggest significant evidence of myopia, which appears to
be increasing over time. Third, we show that ownership of the
firm matters: private firms (who would be unaffected by short-
termism on our definition) tend to invest more than equivalent
publicly owned firms. Together, these findings suggest that these
short-termist distortions can affect materially the rates of invest-
ment by companies and the stock of capital – whether physical
or human. This would have important implications for countries’
future growth rates.
The paper proceeds as follows. Section 2 surveys the litera-
ture on formal tests for short-termism and on the link between
short-termism and investment. Section 3 sets out an analytical
framework for capturing the potentially adverse consequences of
short-termism, in particular for the cost of capital and for invest-
ment intentions. Section 4 presents some empirical evidence on
each of these short-termism channels. Section 5 concludes with
next steps for policy and research on this topic.
2. The short-termism literature
Formal, quantitative evidence on short-termism is thin on the
ground. An exception would be Miles (1993). Using an augmented
version of a basic asset pricing framework, he finds evidence of
excessive discounting of future cash-flows using company-level
equity price data from the UK. Similar approaches, applied to longer
time-series across a range of countries, have reached broadly sim-
ilar conclusions (Cuthbertson et al., 1997; Black and Fraser, 2002).
We follow a similar approach to Miles (1993) in Section 3.
There is also relatively little empirical evidence linking short-
termism and investment. Asker et al. (2011, 2013) provide a test
based on a panel of US companies. They find that firms whose share
price (and by implication, investors) are very sensitive to earn-
ings announcements tend to forgo good investment opportunities.
Firms that are held privately invest significantly more than similar
public firms and are more responsive to investment opportunities.
Tests of periods when firms move from private to public owner-
ship confirm these results. The inference is that private firms do not
face the same earnings-driven pressure to scrimp on investment as
publically quoted firms.
Bushee (1998) identifies firms that fall short of last year’s earn-
ings, so that a slight boost to earnings would deliver earnings
growth. These firms might face strong incentives to reduce R&D
in order to achieve this. The author also identifies institutional
investors that are likely to be myopic, measuring this by momen-
tum trading and portfolio turnover. The finding confirms those in
the other empirical papers, with ownership of shares by myopic
institutional investors increasing the prevalence of R&D cuts.
Bernstein (2012) considers patents as a measure of innovation
output. The author compares US firms which went from private to
public by listing on NASDAQ with similar ones which had started
the process but did not complete it (instrumenting for the poten-
tial bias inherent in withdrawing from listing). The author finds
that, after going public, firms do not reduce the number of patents
registered, but they do tend to reduce considerably a measure of
innovation novelty (patent citations).
At a theoretical level, the possibility of short-termism among
investors is related to a broader literature on behavioural biases
and hyperbolic discounting (Laibson, 1997). Hyperbolic discount-
ing refers to the tendency to choose a ‘smaller and sooner’ reward
over a ‘larger and later’ reward, in a way that is not consistent over
time. This provides one explanation for the excess sensitivity of
consumption to shocks to current income.
Some theoretical papers link short-termism and investment
explicitly. The literature relies on informational problems which
17
dividends can help solve, but at the expense of investment. In Miller
and Rock (1985), managers know the current state of earnings but
investors do not. Dividends provide a signal about earnings that
investors can observe. This means the manager has the incentive
to surprise the market with high dividends, even if this means
cutting investment. Investors understand this, and discount these
inflated dividend signals accordingly. In equilibrium there are no
surprises, but dividends are higher and investment lower than with
full information.
A different type of information asymmetry appears in Stein
(1989). In this model, investors base their valuation of the firm
on expected future earnings. Future earnings are known to be cor-
related with current earnings. The manager understands this and
cuts investment to boost current earnings. This lifts expectations
of future earnings, increasing the firm’s share price.4 In equilib-
rium, the manager’s signal has no effect on share prices, but a
prisoners’ dilemma means that this behaviour continues to reduce
investment.
Investors might also be uncertain about the quality of the man-
ager, as in Narayanan (1985). In this model, shareholders cannot
observe the manager’s ability or the project that is selected. Profits
are observable and boost the investor’s perception of managerial
ability, which translates into higher wages. Knowing this, the man-
ager may select a project that yields short-term profits, even if there
are better long-term projects available.
3. Theory
In this section we use a forward-looking asset pricing frame-
work to show how our definition of short-termism – excess
discounting on the part of investors – might affect project val-
uation and selection. This framework also shows how investor
short-termism may cause a firm’s manager, acting rationally, to
prioritise dividends over investment.
3.1. The trade-off between investing and distributing dividends
We start with a simple model in which two agents – an investor
and a manager – face investment decisions. An investor’s valuation
of a project (either a new firm or an expansion of an existing firm)
that operates for n periods is equal to the present value of the cash
flows or dividends in each period (Di ), plus the discounted terminal
value (Pn ) minus up-front investment costs (C).5

n
Di Pn
NPV = + −C (1)
(1 + r)i (1 + r)n
i=1
The investor’s decision is, in this simple model, all-or-nothing. The
investor follows a simple rule, choosing to invest in all positive NPV
projects and rejecting all negative NPV projects. The investor’s NPV
assessment will therefore determine whether he or she invests,
incurring cost C, or walks away from the investment.

C, NPV > 0
I= (2)
0, NPV ≤ 0
The manager of the project seeks to maximise its NPV. The only
choice variable is the timing of dividends. Dividend payments to
investors can either be paid out as earnings become available at the
end of each period, or cash can be held within the firm for payout
4
The model used is one of “signal-jamming” – i.e. firms engage in costly behaviour
to prevent information from appearing, rather than investing in a costly signal that
conveys information.
5
For more detail see, for example, Brealey et al. (2010).
18 R. Davies et al. / Journal of Financial Stability 12 (2014) 16–25

when the firm is wound up in year n. We assume cash held within With a discount rate of 9%, the project’s cash-flows are worth $65
the firm funds its research programme, which yields a return of today, so its NPV is $5. In other words, this is a project worth invest-
(1 + r), the risk-free rate.6 ing in.
Under certain conditions, the timing of dividends will have no Our definition of short-termism translates into excess discount-
influence on the value of the firm (Modigliani and Miller, 1958). This ing on the part of the investor and is captured by the parameter x.
“dividend irrelevance” will occur when any change in Di is perfectly Amending Eq. (5) to include our short-termism measure
offset by a counterbalancing change in Pn (in present value terms).
$10x $10x2 $10x10
To take a simple example of dividend irrelevance, consider a firm NPV = + + ··· + − $60 (6)
that cuts its year 1 dividend from the maximum possible amount (1 + r) (1 + r) 2
(1 + r)10
(D1 ) to zero. The investor loses D1 in year 1. The cash funds research, If x is less that unity, the project’s dividends are discounted too
earning the risk-free rate (1 + r), and is paid out when the firm is heavily. For example, if x = 0.95 so that one-period-ahead dividends
wound up in year n, so that the investor gains D1 (1 + r)n−1 in year are undervalued by 5%, discounted dividends are now worth $52,
n. In present value terms, the NPV loss is D1 /(1 + r), the NPV gain is not $65, so that the NPV of the project falls from $5 to −$8.8 The
D1 (1 + r)n−1 /(1 + r)n = D1 /(1 + r) and the overall change in the value project is no longer investable. In other words, modest degrees of
of the firm is zero. myopia can flip the NPV, and the initial investment decision, from
More generally, the firm chooses to pay a fraction  i ∈ [0, 1] of positive to negative.
the maximum possible dividend, Di , to the investor in period i. The
remainder (1 −  i ) is held within the firm, earning the risk-free rate,
3.3. Adding a short-termism measure to the valuation model
for payout when the firm is wound up in period n. This yields the
following payoffs:
We now generalise this idea by adding the myopia parameter x

n
Di i 
n
D (1 −  )(1 + r)n−i Pn
to Eq. (3). The equation for the NPV of the firm becomes:
i i
NPV = + + –C (3)
(1 + r) i (1 + r)n (1 + r)n 
n
Di i xi 
n
D (1 + r)n−i (1 −  )xn Pn xn
i i
i=1 i=1 NPV = + n + –C (7)
(1 + r) i (1 + r) (1 + r)n
The first sum in Eq. (3) is the present value of dividends that are i=1 i=1

paid out immediately as cash becomes available. The second sum And the payoff from altering the fraction of cash paid out in period
is the present value of the cash that is not paid out as it becomes i becomes:
available, but is reinvested in the firm, used to fund research, and
∂NPV Di xi D (1 + r)n−i xn Di
then paid out at the wind-up date n. The third and fourth terms = − i = (xi − xn ) (8)
(the terminal value of the firm and the initial investment cost) are ∂i (1 + r) i (1 + r)n (1 + r)i
invariant to the manager’s dividend timing decisions,  i . We can
There are three possible outcomes, depending on the value of x. If
now assess how the manager’s decision to alter  i affects the value
discounting is rational then x = 1. This means that (xi − xn ) = 0 and
of the firm by computing the derivative.
(∂NPV)/(∂ i ) = 0. In this case the investor is indifferent to the man-
∂NPV Di D (1 + r)n−i ager’s dividend decision and so dividend policy has no impact on
= − i =0 (4) the value of the firm. The second case is more interesting. If the
∂i (1 + r) i (1 + r)n
investor is myopic, x < 1 so that (xi − xn ) > 0 and (∂NPV)/(∂ i ) > 0. The
Since this applies in all periods (i.e. ∀i ∈ 1, . . ., n), dividend timing value of the firm is then boosted by distributing more dividends,
does not alter the value of the firm. So the managers’ reinvestment although the firm would then be investing at a sub-optimally low
decision does not influence either firm value or the investor’s initial level. Third, if the investor is long-sighted, then x > 1 so (xi − xn ) < 0
investment decision. and (∂NPV)/(∂ i ) < 0. In this case, the investor values future divi-
dends more highly and the firm should delay dividend payment in
order to maximise its value.
3.2. How excess discounting can alter the dividend-investment In the myopic case (x < 1), the investor prefers dividends to be
trade-off paid out today, rather than allowing the firm’s manager to hold
them for payout tomorrow. This means increasing  in any period
Dividend irrelevance may not hold in reality. One reason could raises the firm’s value. It has another implication too. Consider a
be faulty discounting or short-termism. Since there are various manager that is considering raising  by cutting the firms’ current
definitions of short-termism, we begin by using an example to research budget to pay a higher dividend in just one period. The
illustrate our definition using the model above.7 Consider an invest- manager considers two periods j and k, where j < k. If the maximum
ment project costing $60. This investment is riskless and pays a $10 possible dividend payment is constant over time (Dj = Dk ), then the
dividend at the end of each of 10 years. Its terminal value, Pn , is ratio of the benefits from cutting early compared to those from cut-
zero. Plugging these values into Eq. (1) above, we obtain an equa- ting late is given by (xj − xn )/(xk − xn ) > 1. That is, the benefits from
tion for the present value of the project as the sum of the discounted increasing  diminish with time, so the trade-off between holding
dividends. cash within the firm (to support research, say) versus paying out
$10 $10 $10 is most acute in early periods. That is, early stage research is most
NPV = + + ··· + − $60 (5) costly in terms of lost NPV and the manager should pay dividends
(1 + r) (1 + r) 2
(1 + r)10
as soon as possible in order to maximise the firm’s value.
This simple model explains how we define short-termism and
its relationship to discounting. It also shows how discounting can
6
In reality a firm would want its R&D programme to beat the risk-free rate, and influence a firm’s decision between paying dividends and keeping
the returns from research would be uncertain. Adding these extensions does not
alter the conclusions here.
7
Specifically, we are not assuming any managerial myopia, and unlike Stein
8
(1989) and Miller and Rock (1985), there is no asymmetric information or signalling A $10 return received at the end of year 5 should be worth $6.65 today. With
in this model. myopia, it is worth $5.14.
 R. Davies et al. / Journal of Financial Stability 12 (2014) 16–25 19

cash within the firm to finance investment. The simple model sug-
gests that if investors are myopic, dividend timing becomes very
important. A manager acting entirely rationally may commit rela-
tively less cash (and time and effort) to investment and relatively
more to maintaining a constant stream of dividends.
The null hypothesis – no short-termism – implies x = 1. Drawing on
evidence across time and industrial sectors, it is this restriction we
now test.
4. Empirical evidence of short-termism

3.4. A more formal model with testable implications
In order to test whether investors are myopic, we use a more
formal model of firm valuation. Finance theory typically assumes
that investors care about both the level and uncertainty of their
wealth and are risk averse.9 In this world, agents require a premium
to invest in a company. More formally, the expected return can be
written as the sum of the risk-free rate and a company-specific risk
premium for company j10 :
Et (Rjt ) = Rft + jt
The actual return on an investment is the sum of the capital gain
and the dividend yield:
A testable hypothesis from the models presented is that short-
termism may have dented the willingness of firms to engage in
investment spending. There are two related but distinct channels
through which this might occur. The first is that short-termism
raises to sub-optimally high levels the marginal cost of new capital
to finance projects. This is the channel explored in Section 4.1.
The second channel is that short-termism induces firms to dis-
tribute a sub-optimally high share of their revenues and profits
to shareholders in the form of dividends. This would come at the
expense of ploughing back profits into the business to finance
(9) future investment growth opportunities. Section 4.2 provides illus-
trative estimates of the potential cost of short-termism in terms of
forgone investment.

Pjt+1 − Pjt Djt+1 4.1. The impact of short-termism on investors’ discount rates
Rjt = + (10)
Pjt Pjt
The data set we use comprises a panel of 624 firms listed on the
Assuming an efficient market, actual returns differ only from UK FTSE and US S&P indices over the period 1980–2009.12 These
expected returns due to a forecast error which is uncorrelated with span a broad range of industrial sectors, as shown in Table 1. The
expected returns.11 Using this assumption, we can substitute (9) core inputs to the analysis are firm-level measures of dividends
into (10) to give an equation for the equity price. and equity prices. The average dividend-price ratio in each industry
segment is shown in Table 2.
Et (Pjt+1 + Djt+1 ) The mean dividend-price ratio across the panel is 2.6%. But there
Pjt = (11)
Rft + jt + 1 is a fairly significant degree of cross-sectoral and time-series dis-
persion. For example, dividend-price ratios are almost twice as high
So the price of the security is simply the expected price and divi-
in the energy and utilities sector as the health and pharmaceuticals
dend in the next period, discounted by the sum of the risk-free rate
sector. And mean dividend-price ratios were two-thirds higher in
and the company-specific risk premium. By repeated substitution,
the 1990s compared to the 1980s.
this asset pricing equation can be written as a generalised form of
Following Miles (1993), the company risk premium is modelled
(1):
based on firm-specific characteristics, in particular the company

N
Et (Djt+i ) Et (Pjt+N )
beta and the level of gearing Z:
Pjt = + (12) jt = ˛1 ˇjt + ˛2 Zjt (16)
(1 + rt1,t+i + jt )i (1 + rt1,t+N + jt )N
i=1
where Z = D/E.13
Betas are estimated using daily return data for
The current share price is a function of future discounted dividend firms listed on the S&P 500 and FTSE, together with daily data for the
streams and a discounted terminal share price, where we have indices themselves.14 Mean estimated betas are shown in Table 3.
used: These average below one for both UK and US firms. The distribution
of betas is fairly wide, with over a third of US firms and almost a
Et (jt+k ) = jt , ∀k (13)
fifth of UK firms having a beta in excess of unity.
Et (Rft+k ) = rt1,t+k , ∀k (14) The second component of the firm-specific discount factor is
company gearing. This was constructed using annual Thomson
Eq. (13) is very close to Eq. (9). It says that the expected company- Reuters Datastream data for book value per share, the number
specific risk premium is constant and pre-determined based on of shares outstanding and debt outstanding. Other things equal,
period t information. Eq. (14) says that expectations of future risk- higher gearing would suggest a higher company-specific discount
free rates are defined by the path of the risk-free forward rate factor.15
curve observed at time t. Eq. (12) can be modified with a myopia The final element in the firm-level discount factor calculation
coefficient, x. is the risk-free rate. The yield on government securities was used,
based on data from the Federal Reserve and Bank of England. Having

N
Et (Djt+i )xi Et (Pjt+N )xN estimated (15) using pooled US and UK regressions over 20 years, a
Pjt = + (15)
(1 + rt1,t+i + jt )i (1 + rt1,t+N + jt )N firm-specific risk premium can be calculated. The average premium
i=1 across the sample is 5.9%.

9 12
For background on the mean-variance approach, see Hillier et al. (2008).
10
This is the case with the capital asset pricing model (CAPM) (Lintner, 1965;
Sharpe, 1964) and arbitrage pricing theory (Ross, 1976). Under the CAPM, for
example, the company specific risk premium is equal to the company spe-
cific beta multiplied by the market risk premium jt = ˇjt (Rmt − Rjt ). This means
Et (Rjt ) = Rjt + ˇjt (Rmt − Rjt ).
11
That is, we assume that Rjt = Et (Rjt ) + εjt .
Data are from Thomson Reuters Datastream.
13
Because a firm’s beta ought also to be a function of its business and financing
decisions, we also estimate a restricted version of (16): jt = ˛1 ˇjt .
14
We exclude 7 firms where the estimated beta is greater than 5 in absolute value.
15
The gearing variable is of poorer quality than others in the data, leading to nega-
tive gearing observations for some firms. Any firm-year observations with negative
gearing are excluded from the analysis (a total of 37 observations).
20 R. Davies et al. / Journal of Financial Stability 12 (2014) 16–25

Table 1
Number of firms in each industry segment.

Index Consumer Energy and utilities Financials Health IT Industrials Materials Total

S&P 117 65 78 47 73 47 23 450

FTSE 52 14 42 5 34 18 9 174

Table 2
Mean dividend-price ratio for firms in each industry segment.

Index Consumer Energy and utilities Financials Health IT Industrials Materials

S&P 1.94 2.82 3.19 1.87 1.69 2.55 2.22

FTSE 4.12 3.96 2.63 1.38 2.92 3.81 3.16

Table 3
Estimated betas.

Index Number of firms Number of observations Mean Median S.D

S&P 401 10,140 0.91 0.86 0.49

FTSE 168 3765 0.63 0.62 0.45

The right-hand-side of Eq. (15) defines the stream of future divi-
dends and terminal prices. To generate these, consider a simplified
version of (15) which abstracts from discount rates, company-
specific risk premia and dividends:
Pjt = Et (Pjt+N )xN
Following Wickens (1982), the rational expectation t + N periods
ahead are formed on the basis of information available at time t. For
each company j, these expectations differ from the realised values
by a forecast error (Ujt+N ) unpredictable at time t:
Et (Pjt+N ) = Pjt+N − Ujt+N
Adding and subtracting the average forecast error across all com-
panies (Ūjt+N ) gives:
Pjt = Et (Pjt+N )xN = Pjt+N xN − Ūjt+N xN − (Ujt+N − Ūjt+N )xN
Consistent estimation of (18) is possible using a set of instruments
correlated with Pjt+N but which are independent of the company-
specific excess forecasting errors. In the estimation, lagged share
prices, lagged dividends per share and lagged earnings per share
are used as instruments for future dividends and equity prices.
Given estimates of company beta and gearing, risk-free rates
and the instrumented variables, Eq. (15) can be estimated to gener-
ate estimates of the short-termism parameter, x. This was achieved
using non-linear least squares on a set of cross-sectional regres-
sions for each of the years 1985–2004.16
Table 4 presents the results for each of the years. Our estimate of
the x parameter differs significantly from unity in 11 of the 20 years.
In 13 of the 20 years, x is lower than 1, significantly so in 9 of these
years. Moreover, there is more evidence of myopia in later years:
8 of the 9 myopic years occur in the final decade of the sample.
Table 5 shows point estimates of x over two decadal sub-samples
(1985–1994 and 1995–2004) and over the full sample. Estimates
are significantly below unity in the second sub-sample, but not the
first. The point estimate of x over the second sub-sample is 0.94.17
There are some interesting patterns in the degree of short-
termism across sectors. Table 6 shows estimates of x over the
same three time periods (1985–1994, 1995–2004, full sample) on
a sectoral basis. There is statistically significant evidence of short-
termism in the second half of the sample for all seven industrial
sectors. And in all of these sectors except health and materials, x is
lower in the second half of the sample than the first – in those two
sectors x is below unity throughout the sample.
(17)
There are various reasons why short-termism may have become
more important in equity markets in recent years. In particular,
the proportion of assets held by long-term institutional investors
may have fallen relative to say, hedge funds and, more recently,
high-frequency trading firms. In addition, various commentators,
including investment professionals, have observed an increased
(18) focus on quarterly earnings and a rise in portfolio turnover even
among institutional investors.18 Both of these portfolio trends are
consistent with our findings.
The estimates of short-termism are economically as well as sta-
(19) tistically significant. The estimates for x often lie between 0.9 and
0.95, suggesting excess discounting of between 5% and 10% per
year. To illustrate the impact of this degree of myopia on invest-
ment choice, Chart 1 shows the present value of those income
streams under three counter-factual assumptions: rational dis-
counting; myopic discounting – lower bound (5%); and myopic
discounting – upper bound (10%). The cumulative impact is fairly
dramatic. Ten-year ahead cash-flows under rational discounting
are valued similarly to between six-year (lower bound) and four-
year (upper bound) ahead cash-flows under myopic discounting.
This is illustrated even more clearly if we consider payback periods.
Under rational discounting, payback occurs in 9 years (Chart 2).
Under upper bound myopic discounting, the investor today would
erroneously assume that payback would never be made. These dif-
ferences have the potential to alter radically project choice. The net
present value of this project evaluated over 50 years falls from $56
under rational discounting to a loss of $11 under extreme myopia.
In other words, a NPV-positive project would be rejected.
Put differently, consider how quickly the present value of a
future cash-flow decays to a level of 1% of its face value, under ratio-
nal and myopic discounting. Under rational discounting, cash-flows
even 50 years ahead retain more than 1% of their face value. Under
strong myopic discounting, this residual threshold is reached after
25 years. Virtually zero weight – less than 1000th of the face value

16
Because the estimation uses expected values up to five periods ahead, the esti-
mates only run to 2004.
17
Various robustness checks were conducted. These included dropping gearing
18
from the estimation of the risk premium and varying the effects of taxes. These did On portfolio turnover see for example Haldane and Davies (2011) and on quar-
not alter significantly the empirical estimates. terly earnings see Aspen Institute (2009).
 R. Davies et al. / Journal of Financial Stability 12 (2014) 16–25 21

Table 4
Results, main specification.

Year Constant X Beta Gearing R2 Log L N x<1 x>1

1985 −1.125 (7.648) 1.194 (0.168) 0.121 (0.187) 0.134 (0.498) 0.448 −390 83
1986 5.953 (2.317) 1.207 (0.062) 0.18 (0.087) 1.376 (0.277) 0.791 −390 89 *

1987 −3.201 (2.532) 1.094 (0.032) 0.065 (0.043) 0.133 (0.083) 0.904 −427 100 *

1988 0.822 (1.777) 1.019 (0.024) 0.067 (0.034) 0.105 (0.065) 0.887 −473 108
1989 −1.192 (3.996) 1.048 (0.035) −0.007 (0.045) 0.193 (0.092) 0.908 −501 114
1990 4.862 (4.539) 0.976 (0.035) −0.046 (0.006) 0.101 (0.127) 0.793 −572 116
1991 5.293 (2.297) 0.967 (0.016) 0.082 (0.022) 0.07 (0.082) 0.89 −551 123 *

1992 2.224 (6.412) 1.097 (0.062) 0.083 (0.077) 0.155 (0.166) 0.902 −566 125
1993 −2.71 (5.564) 1.044 (0.028) 0.105 (0.04) 0.056 (0.101) 0.956 −588 133
1994 8.943 (7.728) 0.981 (0.03) 0.066 (0.056) −0.15 (0.107) 0.877 −709 137
1995 4.839 (7.547) 0.969 (0.031) −0.005 (0.056) 0.205 (0.227) 0.942 −681 145
1996 14.264 (7.244) 0.821 (0.033) −0.028 (0.067) −0.341 (0.132) 0.844 −794 152 *

1997 19.582 (7.922) 0.86 (0.013) −0.062 (0.028) −0.025 (0.08) 0.923 −1602 292 *

1998 9.317 (7.639) 0.948 (0.016) −0.052 (0.018) 0.192 (0.053) 0.902 −1931 340 *

1999 11.296 (6.848) 0.914 (0.012) −0.08 (0.014) 0.186 (0.041) 0.888 −2070 354 *

2000 18.479 (11.467) 0.9 (0.013) −0.105 (0.01) 0.042 (0.048) 0.789 −2323 362 *

2001 7.753 (12.51) 0.997 (0.016) 0.023 (0.015) 0.225 (0.044) 0.897 −2267 371
2002 20.674 (8.957) 0.937 (0.016) 0.022 (0.019) 0.162 (0.038) 0.885 −2273 380 *

2003 2.92 (8.094) 0.927 (0.015) 0.012 (0.016) 0.079 (0.04) 0.847 −2318 391 *

2004 21.877 (8.088) 0.97 (0.015) −0.007 (0.017) 0.119 (0.041) 0.802 −2445 394 *

Notes. Results shown are for the full specification, with a separate parameter for gearing included. Standard errors in parentheses. A restricted model, in which gearing is
assumed to enter the beta (i.e. the parameter on gearing is restricted to zero) yields similar results.
*
x is significantly different from 1, using a 95% confidence interval.

Table 5 of the cash-flow – is placed on projects with income streams much

Short-termism estimates for the US and UK.
beyond 35 years.
Year X Standard error Evidence of
short-termism? 4.2. The impact of short-termism on investment
Full sample (1985–2004) 0.937 0.004 Yes
1985–1994 1.001 0.008 No Short-termism may induce firms to distribute a sub-optimally
1995–2004 0.938 0.005 Yes high share of their revenues and profits to shareholders in the
Notes. The significance column refers to a test of whether x is significantly different form of dividends, to meet their demands for near-term income
from 1 at the 5% confidence level. streams, at the expense of retaining, or ploughing back, profits into
the business to finance future growth opportunities.
There is anecdotal evidence that firms may increasingly be seek-
ing to actively manage the quantum and timing of their dividends.

Table 6
Sectoral results.

Year x s.e x<1 x>1

Consumer
1985–1994 325 1.007 0.017
*
1995–2004 814 0.94 0.010
*
All years 1139 0.939 0.008
Energy and utilities
*
1985–1994 127 1.05 0.022
*
1995–2004 429 0.934 0.013
*
All years 556 0.939 0.011
Financials
1985–1994 213 1.087 0.044
*
1995–2004 673 0.962 0.008
*
All years 886 0.963 0.007
Health
1985–1994 69 0.857 0.084
*
1995–2004 230 0.932 0.027
*
All years 299 0.932 0.233
IT
1985–1994 183 0.957 0.024
*
1995–2004 465 0.892 0.019
*
All years 648 0.902 0.015
Industrials
1985–1994 135 1.018 0.051
*
1995–2004 287 0.936 0.025
*
All years 473 0.937 0.021
Materials
*
1985–1994 76 0.871 0.045
*
1995–2004 183 0.86 0.048
*
All years 259 0.892 0.040
*
x is significantly different from 1, using a 95% confidence interval.
22 R. Davies et al. / Journal of Financial Stability 12 (2014) 16–25

x=1.00 x=0.95 x=0.90 Rao

$10
Quoted Private 140
$9
$8 120
$7 100
$6
80
$5
$4 60
$3
40
$2
$1 20
$0 0
0 1 2 3 4 5 6 7 8 9 10 Fixed assets by profits Fixed assets by sales
Years
turnover
Notes: The chart assumes $10 is paid at the end of each
year. The risk-free discount rate used is 1.085. Chart 3. Stocks of fixed assets of private and quoted firms scaled by profits and
sales.
Chart 1. Present value of future cash-flows.
There is also evidence that investment in long-term research
x = 1.00 x = 0.95 in the US and UK, two countries where capital market financing
x = 0.90 Investment cost $140 is most developed, is lagging behind other countries. Japan, South
Korea and China have increased their R&D to GDP ratio since 1980.
$120 By comparison, the US has dropped back, maintaining its R&D
intensity at a roughly stable level over the past 30 years. The UK
$100 R&D record is worse still, with the ratio of R&D to GDP having
fallen secularly. These aggregate numbers are borne out in firm-
$80 level data. In 1993, 94 of the top 200 firms by R&D expenditure
were American or British. By 2009, just 77 were.21 Could this be
$60 due to short-termism?
One way to answer this question is to look at whether invest-
$40 ment patterns are different for quoted firms relative to private
firms. To test this, we use a cross-section of around 140,000 UK
$20 firms in 2010 from Bureau van Dijk, comprising both quoted and
private firms.22 Summary statistics are available in Appendix A. We
$0 focus on measures of the capital stock, rather than the investment
0 5 10 15 20 25 30 35 40 45 50 flow in a particular year, to pick up the long-term or accumulated
Years influence of short-termism on investment choice.
Specifically, we look at corporates’ stock of fixed assets. We
Notes: The cumulative NPV of $10 cash-flows rises to $61 in define the variable of interest as the ratio of the stock of fixed assets
year 9 under rational discounting. With mild myopia (x=0.95) to the flow of profits or turnover of a company. Profits and turnover
it only passes $60 at year 15. With severe myopia (x=0.90)
are used as a normalising measure of the flow of resources avail-
the investor calculates that payback is not achieved.
able for investment in a given year, as well as helping to control for
Chart 2. Cumulative present value of future cash-flows. the different sizes of (public versus private) firms.23
On average, private firms tend to have materially larger stocks
Haldane (2011) presents evidence on firms seeking to maintain of fixed assets relative to their incoming resources (profits or sales
and smooth dividends. Others have observed that firms engage in turnover) than public firms (Chart 3). The average ratio of fixed
“equity recycling” – issuing new equity at the same time as paying assets to profits is over 100 for private firms but only 24 for
dividends, even though it would be less costly to simply cancel the quoted firms. Similarly, if we compare stocks of fixed assets to
dividend.19 Over recent years, some firms continued to pay divi- sales turnover, private firms have stocks of fixed assets 127 times
dends, even though they were running at a loss. This is in stark larger than their sales turnover, while for quoted firms they are
contrast to dividend behaviour in the 19th and early 20th century,
when US and UK firms were as likely to reduce dividends as raise
them.20 21
Source: the Department for Business Innovation and Skills “R&D Scoreboard”.
In the 1993 survey, 81 of the top 200 firms were US firms and 13 were UK firms; the
numbers in 2009 were 68 and 9 respectively.
22
Quoted firms are 1.1% of all UK firms in this sample.
19 23
Weld (2007) finds that 40% of common equity issuance is by firms that are Other papers (e.g. Bernstein, 2012) use the number of patents as dependent
making regular positive dividend payments, and that 20% of this raised equity could variable. As described in the literature review, we consider this as an outcome of
be avoided if firms eliminated dividends. investment, while in this paper we focus on the choice of investment expenditure.
20
See Haldane (2011) for a fuller discussion and Goetzmann et al. (2001) and Also, not all corporate investment results in patents, so such a study investigates a
Braggion and Moore (2008) for the US and UK history. particular subsample of firms.
 R. Davies et al. / Journal of Financial Stability 12 (2014) 16–25 23

Table 7
Effect of private versus public ownership on companies’ stocks of fixed assets.

Dependent variable: fixed assets scaled by profits (1) (2) (3) (4) (5) (6) (7)
* * * * * *
Private 77.09 76.60 125.98 82.58 144.84 231.33 79.14*
(1.85) (1.85) (2.54) (1.76) (1.96) (2.69) (1.97)
Sales turnover −4.79e−10 −1.65e−9 −5.65e−10 3.59e−10 3.35e−11 2.6e−10
(0.52) (1.30) (−0.54) (0.37) (0.02) (0.69)
ROA 0.20*** 0.19*** 0.21* 0.20***
(4.12) (3.30) (2.69) (3.07)
ROA × private −0.74** −0.86** −1.30** −0.98**
(−2.34) (−2.34) (−3.32) (−2.58)
AGE of the company −0.01 −0.05 0.08
(−0.04) (−0.23) (0.43)
AGE of the company × private −3.36* −5.08* −2.77
(−1.87) (−2.32) (−1.58)
Constant 23.91*** 24.41*** 30.13*** 25.27*** 24.49** 31.07**
(3.55) (3.65) (4.23) (3.52) (2.91) (3.62)
Sectoral fixed effects Yes
Sectoral fixed effects × private Yes
ı 4.22 4.14 5.18 4.27 6.91 8.45 see Table 8
R2 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Observations 143,445 143,445 92,843 140,419 140,413 90,797 140,413
Sectors All All Top 5 All All Top 5 All

Notes. t-Statistics in parentheses. Standard errors are robust and clustered at the sector level. “Top 5 sectors” are the five largest sectors by number of companies in the
sample; they are agriculture, manufacturing, wholesale/retail trade, financial intermediation and real estate and cover 91% of total corporate assets in the sample.
*
Effect statistically significant from zero at 10% level of significance.
**
Effect statistically significant from zero at 5% level of significance.
***
Effect statistically significant from zero at 1% level of significance.

25 times larger. In other words, investment stocks are four or investment multiplier becomes: ı = (ˇ1 + ˇ7 + ˇ8 )/ˇ7 .
five times larger in our sample for private firms than for quoted
firms. This is consistent with private firms re-investing a larger FIXEDASSETSit = ˇ1 PRIVATEit + ˇ2 SALESit + ˇ3 ROAit + ˇ4 ROAit
proportion of their profits or sales in fixed assets than quoted × PRIVATEi + ˇ5 AGEit + ˇ6 AGEit × PRIVATEi
firms.
To test this formally, we regress companies’ stocks of fixed + ˇ7 i + ˇ8 i × PRIVATEi + εit (21)
assets normalised by profits (FIXEDASSETS) on an indicator for
Table 7 presents estimates of the potential impact of public owner-
whether the company is private (PRIVATE), controlling for compa-
ship on corporate investment. Column 1 presents the baseline
nies’ sales turnover (SALES), return on assets (ROA) and the age of
regression without other firm-level characteristics. The investment
the company (AGE).24 ROA and AGE are interacted with whether a
multiplier from being a private firm is 4.2. In column 2, control-
company is private to allow for differential effects for private and
ling for sales turnover, private firms appear to hold significantly
public companies. The main specification is as follows.
larger stocks of fixed assets relative to their profits – the investment
multiplier from being a private firm is 4.1.
FIXEDASSETSit = ˛ + ˇ1 PRIVATEit + ˇ2 SALESit + ˇ3 ROAit + ˇ4 ROAit In column 3, we narrow the sample to the five largest sectors
× PRIVATEi + ˇ5 AGEit + ˇ6 AGEit × PRIVATEi + εit (agriculture, manufacturing, wholesale/retail trade, financial inter-
mediation and real estate), which comprise over 92,000 firms and
(20) cover over 90% of total corporate assets in the sample. Private firms
in these five sectors appear to have built even larger (and signif-
The constant (˛) yields the baseline ratio for quoted firms icant) stocks of fixed assets relative to their profits than quoted
and ˇ1 measures the extra boost to fixed assets from being firms - the investment multiplier from being a private firm is 5.2.
a private firm. The difference in investment from being a
private firm is: ı = (˛ + ˇ1 )/˛. We call this the “investment Table 8
multiplier”. Investment multipliers (ı) by sector.
In further specifications we check the robustness of the results,
Sector ı
first, by restricting the sample to the five largest productive sectors
(agriculture, manufacturing, wholesale/retail trade, financial inter- 1 Agriculture, hunting and forestry −34.2
2 Fishing −5.3
mediation and real estate); and second, by controlling for sectoral
3 Mining and quarrying −13.2
fixed effects  i (also interacted with the PRIVATE indicator) (Eq. 4 Manufacturing 10.7
(21)). When sectoral fixed effects are included, the sector-specific 5 Electricity, gas and water supply −6.1
6 Construction 0.8
7 Wholesale and retail trade 8.5
8 Hotels and restaurants −5.7
9 Transport, storage and communication 3.5
24
For comparison, Asker et al. (2011) include as controls: assets; sales growth; 10 Financial intermediation 15.7
gearing; cash/assets ratio; retained earnings/assets ratio; age of the company; and 11 Real estate, renting and business activities 6.6
return on assets. We decided not to include assets as a control because the order 12 Public administration and defence −1.9
of magnitude is very different between private and public firms, even after taking 13 Education −6.6
logs, and it would have forced doubtful comparisons. We have experimented adding 14 Health and social work 4.6
sales growth and gearing as controls but this did not produce easily interpretable
results. The other two ratios (cash/assets and retained earnings/assets) are not in Note. Benchmark sector: wholesale and retail trade (for median ratio of fixed assets
our dataset. to profits).
24 R. Davies et al. / Journal of Financial Stability 12 (2014) 16–25

Table 9
Summary statistics.

Variable Obs Mean Std. Dev. Min Max

Private firms (98.9% of the sample)

Fixed assets (GBP) 141,920 32,000,000 1,240,000,000 1 322,000,000,000
Fixed assets scaled by profits 141,920 101 8858 −609809 1927855
Fixed assets (% of assets) 141,920 36 34 0 100
Total assets (GBP) 141,920 73,000,000 2,990,000,000 1 481,000,000,000
Profit after tax (GBP) 141,920 1,663,835 73,900,000 −5,210,000,000 12,500,000,000
Sales turnover (GBP) 141,920 25,400,000 516,000,000 −23,500,000 120,000,000,000
Return on assets 138,905 16 53 −223 328
Age of the company (years) 141,914 17 18 1 154

Quoted firms (1.1% of the sample)

Fixed assets (GBP) 1525 1,520,000,000 14,500,000,000 386 319,000,000,000
Fixed assets scaled by profits 1525 24 431 −5479 11795.26
Fixed assets (% of assets) 1525 59 28 0 100
Total assets (GBP) 1525 2,290,000,000 18,200,000,000 90,866 370,000,000,000
Profit after tax (GBP) 1525 79,100,000 601,000,000 −2120,000,000 13,100,000,000
Sales turnover (GBP) 1525 1,040,000,000 8,740,000,000 −246,000 242,000,000,000
Return on assets 1514 −3 27 −217 103
Age of the company (years) 1525 26 31 2 153

Table 10
Summary statistics by sector.

Obs Fixed assets (% total assets) Fixed assets scaled by profits

Private firms (98.9% of the sample)

1 Agriculture, hunting and forestry 1421 50 2
2 Fishing 116 49 4
3 Mining and quarrying 655 41 17
4 Manufacturing 13,451 28 1
5 Electricity, gas and water supply 486 55 −8
6 Construction 10,310 26 −54
7 Wholesale and retail trade; repairs 15,845 25 14
8 Hotels and restaurants 4063 63 37
9 Transport, storage and communication 5439 37 0
10 Financial intermediation 5690 33 574
11 Real estate, renting and business activities 53,180 38 193
12 Public administration and defence 374 25 11
13 Education 3649 44 14
14 Health and social work 7275 42 6
15 Other community, social and personal services 16,945 40 19

Quoted firms (1.1% of the sample)

1 Agriculture, hunting and forestry 12 59 2
2 Fishing 0
3 Mining and quarrying 90 70 −7
4 Manufacturing 309 52 10
5 Electricity, gas and water supply 15 72 −3
6 Construction 37 33 15
7 Wholesale and retail trade; repair of mo 105 45 12
8 Hotels and restaurants 24 79 −13
9 Transport, storage and communication 58 62 19
10 Financial intermediation 342 75 42
11 Real estate, renting and business activities 442 54 37
12 Public administration and defence 0
13 Education 4 58 −8
14 Health and social work 12 60 11
15 Other community, social and personal services 64 65 7

Column 4 adds return on assets, alone and interacted for being a
private firm. In general, firms appear to invest more, the larger their
return on assets, but less so for private firms. The investment multi-
plier remains significant and above 4. Column 5 adds the longevity
of the company, with age of the company both alone and interacted
with the ‘private’ dummy. Controlling for age raises the invest-
ment multiplier to over 6. There is a non-significant relationship
between investment and the age of the company; but private firms
tend to invest more, the younger they are, as might be expected.
Column 6 restricts the latter specification to the five largest sec-
tors. The direction and significance of all effects is the same, only
with stronger magnitudes. The investment multiplier of these five
sectors is estimated at over 8.
Finally, column 7 adds fixed effects for each sector. Again, the
direction, magnitude and significance of the effects are robust to
this specification. Table 8 presents the investment multipliers by
sector. Relative to the median sector,25 private firms in the sectors
of manufacturing; transport, storage and communication; financial
intermediation; real estate; health and social work and community
services exhibit positive multipliers on their investment relative to
quoted firms, with multipliers ranging from 4 to 15.
25
The benchmark category is the wholesale and retail trade sector, with the
median ratio of fixed assets to profits in the sample.
 R. Davies et al. / Journal of Financial Stability 12 (2014) 16–25
These results suggest, overall, that UK private firms tend to
plough back between 4 and 8 times more of their profits into their
business over time than publicly held firms.
5. Conclusions and next steps
On the basis of the evidence presented here, short-termism in
capital markets appears to come with a potentially significant price
tag, albeit one which is often hidden from view. The evidence is
drawn from asset prices in capital markets and from investment
decisions by companies. Both point to a quantitatively significant
degree of short-termism in capital markets, whether measured by
the cost of capital or investment intentions.
To assess the broader implications of these estimates for the
economy, consider a simple ready-reckoner. Assume the short-
termism problem can be approximated by the difference in the
investment performance of public and private firms. Given the
public/private split of firms, the stock of capital at quoted firms
would then be several times larger in the absence of short-termism.
Assume a standard Cobb-Douglas production function with con-
stant returns to scale and an elasticity of output with respect to
capital of 0.3. A simple back of the envelope exercise suggests that
the elimination of short-termism would then result in a level of
output around 20% higher than would otherwise be the case. Even
if this is an upper bound, it suggests the gains are potentially sub-
stantial.
From a research perspective, further work could usefully be
done to better calibrate these gains. Using alternative identify-
ing restrictions to gauge the potential impact of short-termism on
investment choice is one potential avenue – for example, the effects
of firms switching from private to public or vice versa. Comparing
the experience of different countries, with different sets of com-
pany law and different patterns of capital market financing, may
also be revealing.
From a policy perspective, there are a variety of potential meas-
ures that could be considered which lean against short-termist
tendencies by investors (see Kay, 2012). Among the more obvious
are alterations to the tax code to provide companies with stronger
incentives to retain (rather than distribute) profits and to provide
investors with stronger incentives to hold (rather than churn)
investment assets – for example, by issuing “loyalty bonuses”
(Bolton and Samama, 2010). Another policy option would be to
rebalance the distribution of voting rights within a firm towards
longer-duration investors – for example, as is the case for some
French companies. All of these options would benefit from greater
research, given the quantitatively significant degree of capital mar-
ket myopia estimated in this paper.
Appendix A.
See Tables 9 and 10
References
Asker, J., Farre-Mensa, J., Ljungqvist, A., 2011. Comparing the Investment Behavior
of Public and Private Firms, NBER Working Paper 17394.
Asker, J., Farre-Mensa, J., Ljungqvist, A., 2013. Corporate Investment and
Stock Market Listing: A Puzzle?, Working Paper http://papers.ssrn.com/sol3/
papers.cfm?abstract id=1603484
25
Aspen Institute, 2010. Short-Termism and US Capital Markets, A Compelling Case
for Change. Aspen Institute, USA.
Aspen Institute, 2009. Overcoming short-termism: a call for a more responsible
approach to investment and business management. In: The Aspen Institute
Business and Society Program, September 9.
Bernstein, S., 2012. Does Going Public Affect Innovation? Stanford Graduate School
of Business, Working Paper.
Black, A., Fraser, P., 2002. Stock market short-termism—an international perspective.
Journal of Multinational Financial Management 12, 135–158.
Bolton, P., Samama, F., 2010. L-Shares: Rewarding Long-term Investors. Committee
on Global Thought, Columbia University, mimeo.
Braggion, F., Moore, L., 2008. Dividend Policies in an Unregulated Market: The
London Stock Exchange 1895–1905. Tilburg University, Center for Economic
Research, Discussion Paper 2008-83.
Brealey, R.A., Myers, S.C., Allen, F., 2010. Principles of Corporate Finance. McGraw-
Hill, UK.
Bushee, B.J., 1998. The influence of institutional investors on myopic R&D invest-
ment behavior. The Accounting Review 73 (July (3)), 305–333.
Business Roundtable, Krehmeyer, D., Orsagh, M., Schacht, K.N., 2006. Breaking the
Short-Term Cycle. Business Roundtable Institute for Corporate Ethics, 24 July.
Cuthbertson, K., Hayes, S., Nitzsche, D., 1997. The behaviour of UK stock prices
and returns: is the market efficient? The Economic Journal 107 (443),
986–1008.
European Commission, 2011. The EU Corporate Governance Framework. In:
COM(2011), 164 final.
Financial Stability Board, 2013. Financial Regulatory Factors Affecting the Avail-
ability of Long-term Investment Finance, Report to G20 Finance Ministers and
Central Bank Governors.
Financial Times, 2012. Industry shows mixed response to Kay Review, 29th June.
Goetzmann, W.N., Ibbotson, R.G., Peng, L., 2001. A new historical database for the
NYSE 1815 to 1925: performance and predictability. Journal of Financial Markets
4 (1), 1–32.
Graham, J.R., Harvey, C.R., Rajgopal, S., 2005. The economic implications of corporate
financial reporting. Journal of Accounting and Economics 40, 3–73.
G30 Working Group, 2013. Long-Term Finance and Economic Growth, Special
Report.
Haldane, A.G., 2011. Capital discipline, remarks based on a speech given at
the American Economic Association, Denver. http://www.bankofengland.co.uk/
publications/speeches/2011/speech484.pdf
Haldane, A.G., Davies, R., 2011. The short long. In: Speech given at the 29th Société
Universitaire Européenne de Recherches Financières Colloquium, Brussels
http://www.bankofengland.co.uk/publications/Documents/speeches/2011/
speech495.pdf
Hillier, D., Grinblatt, M., Titman, S., 2008. Financial Markets and Corporate Strategy.
McGraw-Hill, UK.
Hoggarth, G., Reis, R., Saporta, V., 2002. Costs of banking system instabil-
ity: some empirical evidence. Journal of Banking and Finance 26 (5),
825–855.
Kay, 2012. The Kay Review of UK Equity Markets and Long-Term Decision Making.
Department for Investment, Business and Skills, United Kingdom, July.
Laibson, D., 1997. Golden eggs and hyperbolic discounting. Quarterly Journal of
Economics 112 (2), 443–477.
Lintner, J., 1965. The valuation of risk assets and the selection of risky investments
in stock portfolios and capital budgets. Review of Economics and Statistics 47
(1), 13–37.
Miles, D., 1993. Testing for short termism in the UK stock market. The Economic
Journal 103 (421), 1379–1396.
Miller, M.H., Rock, K., 1985. Dividend policy under asymmetric information. The
Journal of Finance 40 (September (4)), 1031–1051.
Modigliani, F., Miller, M., 1958. The cost of capital, corporation finance and the theory
of investment. American Economic Review 48 (3), 261–297.
MORI, 2004. NAPF/IMA Short-termism Study Report.
Narayanan, M.P., 1985. Managerial incentives for short-term results. Journal of
Finance 40 (December (5)), 1469–1484.
Poterba, J., Summers, L.H., 1995. A CEO survey of U.S. companies’ time horizons and
hurdle rates. Sloan Management Review, 43–53, Fall.
Ross, S.A., 1976. The arbitrage theory of capital asset pricing. Journal of Economic
Theory 13, 341–360.
Sharpe, W.F., 1964. Capital asset prices: a theory of market equilibrium under con-
ditions of Risk. Journal of Finance 19 (3), 425–442.
Stein, J., 1989. Efficient capital markets, inefficient firms: a model of myopic corpo-
rate behavior. Quarterly Journal of Economics 104 (4), 655–669.
Weld, W., 2007. Recycled Equity. Cornell University, Working Paper.
Wickens, R.M., 1982. The efficient estimation of econometric models with rational
expectations. Review of Economic Studies 49 (1), 55–67.