You often hear people speculate that the “shareholder value” movement has, perversely, caused corporate executives to be unduly focused on short-term fluctuations and avoid the big picture. But is it really true? John Asker, Joan Farre-Mensa, and Alexander Ljungqvist (via Robin Hanson) offer some evidence that it is. Compared to privately owned firms, publicly traded ones seem to underinvest:
We evaluate differences in investment behavior between stock market listed and privately held firms in the U.S. using a rich new data source on private firms. Listed firms invest less and are less responsive to changes in investment opportunities compared to observably similar, matched private firms, especially in industries in which stock prices are particularly sensitive to current earnings. These differences do not appear to be due to unobserved differences between public and private firms, how we measure investment opportunities, lifecycle differences, or our matching criteria. We suggest that the patterns we document are most consistent with theoretical models emphasizing the role of managerial myopia.
I suppose it’s possible that the correct interpretation of this is that private firms are overinvesting, but that seems like a stretch. We’ve seen over the past few years that newish businesses—most famously Facebook—seem increasingly reluctant to go public in part out of this sense that engaging in the stock price fluctuation sweepstakes would be a huge distraction from actually running the company.
