Mark J. Roe, Looking for the Economy-Wide Effects of Stock Market Short-Termism (2021).
Abstract: To investigate the widespread claim that stock market short-termism is a major drag on U.S. corporate investment, R&D, and the broad economy, the author examines trends in corporate capital investment, buybacks, and R&D that stretch back, in some cases, over the past 50 years. (He briefly summarizes firm-level data and explains their limits in making policy recommendations.) As critics of market-driven corporate short-termism have pointed out, U.S. corporate investment in capital equipment and other tangible assets has been falling steadily since the late 1970s, and buybacks have been rising. This relationship is suggestive of large public firms pushing out their cash and weakening their capacity to invest. But if the story of economy-wide short-termist decline due to stock market pressure were valid and strong, we would expect to see the following: (1) investment spending in the United States declining faster than in Europe and Japan, where large companies depend less on stock markets for capital and where shareholder activists are less influential; (2) cash from large share buybacks inducing a bleeding out of cash from the U.S. corporate sector; and (3) economy-wide declines in corporate R&D spending. What the author reports, however, is U.S. corporate R&D spending, far from falling, has been rising since the 1970, and is rising faster than the economy is growing. And while corporate distributions of capital through dividends and gross buybacks have also been rising sharply for decades, corporate cash holdings (as a percentage of total assets), are at near record high levels. The best explanation for such high cash holdings together with record-high payouts—and perhaps the author’s most striking finding—is that such distributions are closely matched to new corporate borrowings. What’s more, the annual pattern of net payouts by S&P 500 companies, often mature companies, is remarkably similar to net new investment into smaller public companies outside of the S&P 500 companies. Since capital spending by European and Japanese companies—which face neither U.S.-style quarterly-oriented stock markets nor aggressive activist investors—has been falling more rapidly than in American companies suggests that U.S. capital markets may not be a particularly powerful source of corporate shortsightedness. The author brings forward alternative explanations. These trends do not preclude the possibility that had the critics’ proposals been in place decades ago, investment, R&D, and overall performance would have been even better. But before embarking on potentially expensive reforms we should have more confidence that there is indeed a severe problem that needs addressing. For example, while critics see short-termism as damaging American R&D, the numbers show corporate R&D spending to be rising, while government support for innovation and R&D has been falling since the financial crisis. If innovation needs more support, it’s the government cutbacks that would first seem to need to be addressed.