A fierce debate has been raging over whether shareholder-driven “short-termism” (or “quarterly capitalism”) is a critical problem for U.S. public firms, their investors, and the nation’s economy. Certain academics (Bratton and Wachter, 2010; Coffee and Palia, 2015), corporate lawyers (Lipton, 2015), Delaware judges (Strine, 2010), and think tanks (Aspen Institute, 2009) contend that quarterly capitalism, exacerbated by the growing power of hedge funds, is substantially impairing firms’ ability to invest and innovate for the long term. Pushing back against this view, a number of academics have forcefully argued that hedge funds play a useful role in the market ecosystem (Bebchuk and Jackson, 2012; Gilson and Gordon, 2013; Kahan and Rock, 2007) and that concerns over short-termism are greatly exaggerated (Bebchuk, 2013; Roe, 2013).
The empirical evidence on shareholder activism and short-termism is, in fact, mixed. Market pressures can lead executives to act in ways that boost the short-term stock price at the expense of long-term value (Bushee, 1998; Dichev et al., 2013; Graham et al., 2006) and may undesirably reduce investment at public firms (Asker et al., 2015). But these costs must be weighed against the potential reduction in agency costs created by greater director accountability to shareholders. One prominent study finds evidence of such benefits, reporting that shareholder activism increases the stock price at targeted firms in both the short term and the long term (Bebchuk et al., 2015). Subsequent work, however, seeks to challenge these findings (Cremers et al., 2016).
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