Posted by Vikas Agarwal (Georgia State University), Rahul Vashishtha (Duke University), and Mohan Venkatachalam (Duke University), on
Wednesday, July 11, 2018
Vikas Agarwal is H. Talmage Dobbs, Jr. Chair and Professor of Finance at Georgia State University J. Mack Robinson College of Business; Rahul Vashishtha is Associate Professor of Accounting at Duke University Fuqua School of Business; and Mohan Venkatachalam is R.J. Reynolds Professor of Accounting at Duke University Fuqua School of Business; This post is based on their recent article, forthcoming in the Review of Financial Studies.
Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).
Considerable anecdotal and large-sample evidence suggests that pressure from institutional investors to report superior short-run financial performance can hinder investment in innovative projects that hurt short-term profits but generate value in the long run. But what incentivizes institutional investors to place excessive focus on short-run results? In Mutual Fund Transparency and Corporate Myopia (Review of Financial Studies, 2018, 31(5), pp. 1966-2003), we explore the role of mandated frequent disclosures of portfolio holdings by mutual fund managers in shaping their emphasis on short-term corporate performance and the concomitant myopic underinvestment in innovative activities by investee firms’ managers.
Our focus on the mutual fund portfolio disclosures is motivated by prior work that argues that fund managers’ short-term focus stems from their career concerns (e.g., Shleifer and Vishny, 1990) and greater transparency about their actions (i.e., portfolio choices) can amplify these concerns (e.g., Prat, 2005). Intuitively, the idea is that fund managers are concerned about their own performance measurement, which is used by fund investors to infer fund managers’ stock picking abilities. Suppose a fund manager invests in a firm that is making significant R&D investments that will only payoff in the long run but results in poor short-term earnings and stock price performance. Such a fund manager runs the risk that fund investors may attribute poor short-term performance of the investee firm to poor stock selection ability, resulting in fund outflows and job termination. Thus, career concerns reduce fund managers’ willingness to “ride-out” the declines in short-term performance of investee firms. READ MORE »
