Are U.S. firms becoming more short-term oriented? Evidence of shifting firm time horizons from implied discount rates, 1980–2013

Abstract

Research Summary: We provide evidence that investors in U.S. public markets are increasingly discounting firms' expected future cash flows during 1980–2013. This trend is shown not only on average across firms, but also within firms over time after alternative explanations are accounted for. To corroborate a link with firm time horizons, we estimate the relationship between an implied discount rate (“IDR”) and factors relevant to firm long-term strategy. We find that IDR is correlated in expected ways with firm investments, management incentives, financial health, ownership, and external pressures—measures that have been argued to correlate with firm time horizons. This article represents one of the first attempts to document market-wide evidence of shortening firm time horizons. These changing horizons bear important implications for firm strategy. Managerial Summary: Whether U.S. 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.