the more sensitive share prices are to earnings news, the greater is the incentive to distort investment and hence the greater should be the difference in public and private firms’ investment sensitivities… . These cross-sectional patterns (reacción de la cotización a las noticias sobre beneficios esperados que no se produce, lógicamente, en el caso de las sociedades no cotizadas) are consistent with the notion that public firms invest myopically.
This finding adds to existing survey evidence of widespread short-termism in the U.S. Poterba and Summers (1995) find that publicfirm managers prefer investment projects with shorter time horizons, in the belief that stock market investors fail to properly value long-term projects. Ten years on, Graham, Harvey, and Rajgopal (2005, p. 3) report the startling survey finding that “the majority of managers would avoid initiating a positive NPV project if it meant falling short of the current quarter’s consensus earnings [forecast].” This is not to say that effective corporate governance cannot reduce public-firm managers’ focus on short-term objectives. Tirole (2001) argues that large shareholders have an incentive to actively monitor managers and fire them if necessary, while Edmans’ (2009) model shows that the presence of large shareholders can reduce managerial myopia. But it is an empirical question whether these mechanisms are sufficiently effective on average. Our evidence suggests that, at least on the dimension of investment, this may not be the case.