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The Effect of Investor Short-Termism on the Capital Demand of European Listed Firms

Author

Listed:
  • Zoltán Schepp

    (University of Pécs)

  • József Ulbert

    (University of Pécs)

  • Ákos Tóth-Pajor

    (University of Pécs)

Abstract

The study examines the relationship between investors’ intertemporal preferences and capital demand in European listed firms’ practices. It seeks to find out how investor short-termism influenced European companies’ capital demand in 2004– 2016. The analysis of the link between the cost of equity and businesses’ capital demand reveals the effects of macro-level shocks such as the recession, the change in the interest rate environment and the shifting equity risk premium on capital markets. To answer the question that our research focused on, we estimated the implicit intertemporal discount surplus typical of the companies under review and thus determined the discount rate in excess of the cost of capital that describes investors’ intertemporal preferences. We then explored the relationship between the cost of equity and capital demand using regression models. We found that in the practices of European listed firms, the decrease in capital demand and the resulting restrictions on investment are attributable to growth in the intertemporal discount surplus. If investors prioritise their short-term interests on the capital markets and companies adapt to investors’ intertemporal preferences, long-run shareholder value accumulation is undermined. Additionally, and in connection with the above, growth in the intertemporal discount surplus can also delay the effects of monetary easing.

Suggested Citation

  • Zoltán Schepp & József Ulbert & Ákos Tóth-Pajor, 2020. "The Effect of Investor Short-Termism on the Capital Demand of European Listed Firms," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 19(2), pages 88-106.
  • Handle: RePEc:mnb:finrev:v:19:y:2020:i:2:p:88-106
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    File URL: https://en-hitelintezetiszemle.mnb.hu/letoltes/fer-19-2-st4-schepp-ulbert-toth-pajor.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    capital demand; investment decisions; intertemporal preferences; intertemporal discount surplus; hyperbolic discounting; investor short-termism;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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