Stock Market Short-Termism.

• Position: Working Papers

"Stock Market Short-Termism's Impact," by Mark J. Roe. May 2018. SSRN #3171090.

"Short-Termism and Capital Flows," by Jesse M. Fried and Charles C.Y. Wang. May 2018. SSRN #2895161

American investors, and thus the companies in which they invest through public stock markets, are allegedly characterized by excessive "short-termism"--that is, their demand for quick returns undercuts long-term investment. This, in turn, supposedly is responsible for decreased research and development, and a subsequent decline in U.S. living standards. In my Winter 2017-2018 Working Papers column I described a paper by Steven Kaplan that presented data inconsistent with short-termism. These two papers also argue against the idea that changes in investing have reduced R&D and living standards. Mark Roe notes that stock trading has increased enormously and the average time investors hold stock has deceased drastically over time, but R&D has not. Instead R&D has increased from about 1% of gross domestic product in the 1970s to almost 1.8% now.

Many criticize stock buybacks as a sign of lack of corporate investment in the future. Stock buybacks have increased since the 2007-2008 financial crisis, but long-term borrowing rose in tandem. Low interest rates induced corporate America to substitute low-interest debt for stock. As a result, public firms have more cash, not less.

Capital investment is down in the past decade, but not because of stock market short-termism. First, factory capacity utilization in the United States has failed to fully recover from the 2007-2009 recession. Capacity utilization was still only 75% in January 2017, down from 81% before the recession. When capacity is more fully utilized, investment will rationally follow. Second, if the stockmarket-driven story were correct for the United States, we should see differences between capital spending trends for the United States and for nations in which capital comes from banks rather than equity markets. But the capital expenditure decline since the 2007-2009 economic setback exists in Europe and Japan as well.

The Fried and Wang paper challenges an influential 2014 Harvard Business Review article entitled "Profits Without Prosperity," by William Lazonick...