Accepted by Gordon Richardson. This paper was presented at the 1999 Contemporary Accounting Research Conference, generously supported by the CGA-Canada Research Foundation, CMA Canada, the Canadian Institute of Chartered Accountants, Certified General Accountants of British Columbia, and the Institute of Chartered Accountants of British Columbia. I would like to thank Jeff Abarbanell, Vic Bernard, Christine Botosan, Sudipta Basu, Bill Cready (discussant), Gus DeFranco, Dawn Matsumoto, Greg Miller, Steve Monahan, Jana Raedy, Gordon Richardson (editor), two anonymous reviewers, and workshop participants at Baruch College, the 1999 Contemporary Accounting Research Conference, George Washington University, Harvard Business School, the 1999 Hong Kong University Summer Symposium, and Waseda University for their helpful comments and suggestions. I also gratefully acknowledge the financial support of the Coopers and Lybrand Foundation, Harvard Business School, the University of Chicago Graduate School of Business, and the University of Michigan Business School.
Do Institutional Investors Prefer Near-Term Earnings over Long-Run Value?*
Article first published online: 15 JAN 2010
2001 Canadian Academic Accounting Association
Contemporary Accounting Research
Volume 18, Issue 2, pages 207–246, Summer 2001
How to Cite
Bushee, B. J. (2001), Do Institutional Investors Prefer Near-Term Earnings over Long-Run Value?. Contemporary Accounting Research, 18: 207–246. doi: 10.1506/J4GU-BHWH-8HME-LE0X
- Issue published online: 15 JAN 2010
- Article first published online: 15 JAN 2010
- Institutional investors;
- Investor clienteles;
- Managerial myopia;
- Market efficiency
This paper examines whether institutional investors exhibit preferences for near-term earnings over long-run value and whether such preferences have implications for firms' stock prices. First, I find that the level of ownership by institutions with short investment horizons (e.g., “transient” institutions) and by institutions held to stringent fiduciary standards (e.g., banks) is positively (negatively) associated with the amount of firm value in expected nearterm (long-term) earnings. This evidence raises the question of whether such institutions myopically price firms, overweighting short-term earnings potential and underweighting long-term earnings potential. Evidence of such myopic pricing would establish a link through which institutional investors could pressure managers into a short-term focus. The results provide no evidence that high levels of ownership by banks translate into myopic mispricing. However, high levels of transient ownership are associated with an over- (under-) weighting of near-term (long-term) expected earnings, and a trading strategy based on this finding generates significant abnormal returns. This finding supports the concerns that many corporate managers have about the adverse effects of an ownership base dominated by short-term-focused institutional investors.