Are US Firms Becoming More Short-Term Oriented? Evidence of Shifting Firm Time Horizons from Implied Discount Rates, 1980-2013

Abstract

Whether US firms have become more short-term oriented remains an active debate among managers, investors, researchers, and policymakers. In this study, we report that investors have been increasingly discounting the expected future returns of public firms over the last three decades. We find that a firm’s discounting rate is explained by signals of its long-term strategy, including investment decisions, ownership structure, financial health, executive compensation scheme, and short-term pressures from the external environment. Our findings indicate a market-wide contraction of firm time horizons, highlighting firm characteristics that suggest how and why firms differ in their time horizons. These demonstrated relationships may help guide firms in devising investment strategies as well as external communications to attract investors that share a firm’s preferred time horizon.