Rob Swystun, Pristine Advisers
Much like individuals have a “type” they’re attracted to, companies have a “type” for investors. But companies don’t go for tall, dark and handsome. They like long-term and passive investors, at least according to studies that have been done.
However, one other thing those same studies reveal is that it might not actually matter at all what type of investors a company has.
In their white paper “Does the Composition of a Company’s Shareholder Base Really Matter?” Stanford University faculty members Anne Beyer, David Larcker and Brian Tayan say that a recent survey by National Investor Relations Institute (NIRI) and the Rock Center for Corporate Governance at Stanford University found:
- 91 % of companies discuss shareholder composition at the senior-executive level;
- 75% discuss shareholder composition at the board level
- CEOs spend 4.2 days per quarter managing their shareholder base
- CFOs spend 6.4 days per quarter managing their shareholder base
- 80% believe their stock would trade at a 15% higher price and have a 20% decrease in price volatility over a two to three year period if they could attract their “ideal” shareholder base.
So, What Are Ideal Shareholders?
The NIRI/Rock Center study found that 92% of companies overwhelmingly prefer investors who have a “long-term investment horizon.” In fact, this was the most highly rated among all attributes surveyed. Companies really want their investors to be in it for the long haul. But, just what is “long-term”? Well, “long”-term is a surprisingly short 2.8 years.
Short term investors, as seen by these numbers, are thought of as almost pests:
- 65% of respondents believe that investors with a short-term perspective distract from strategic decision making
- 51% believe they focus too much on cost reduction
- 57% believe a company with a shareholder base that is dominated by short-term investors will have reduced market growth and/or reduced long-term growth
This all seems like common sense in the investing world. You read and hear all the time that long-term investors are preferable to short-term investors and even when you go to invest in mutual funds at your bank, the person you talk to will almost certainly explain that it’s better to be patient with your investments and stick with them for a long time.
But is it True?
All the talk of long-term investors, though, isn’t really backed up by the studies that have been performed on the subject, the white paper authors say. It’s not that research shows the exact opposite, it’s that there isn’t much data to go on and the studies that do exist are inconclusive.
The authors cite a study by Michael Barclay and Clifford Holderness on blockholders (shareholders that own at least 5% of a company’s stock). These researchers found that large share blocks trade at a 16% premium to open-market prices, which suggests block ownership is perceived to have value, but it does not show that block ownership actually translates into better performance. Similarly, studies by John McConnell and Henri Servaes and Hamid Mehran also found no relationship between block ownership by an outside investor and a company’s market value.
The white paper authors speculate that while some blockholders increase value by promoting a shareholder orientation, others detract from the value by extracting corporate assets for personal benefit, muting their impact on average.
Beyer, Larcker and Tayan then turn their attention to activist funds and how they have affected stock performance with their often visible public campaigns that attempt to compel corporate change. The results, the authors found, have been mixed.
Discussing union-affiliated pension funds that often espouse corporate change involving executive compensation, board-related matters, bylaw changes, and limits on lobbying and political spending, the authors say these activist funds have a sporadic track record of initiating change, but that doesn’t translate into better share performance.
“Only a small minority of union-sponsored proxy proposals receive majority support,” the authors write. “Similarly, there is little evidence that their activism increases shareholder value.”
And, finally, Beyer, Larcker and Tayan say that the evidence doesn’t show that companies whose shareholders have a predominantly “shortterm” investment horizon perform differently than companies whose shareholders have a “long-term” horizon.
The authors cite a study by Brian Bushee that finds companies with a high percentage of short-term investors have incrementally higher stock price volatility, while those with a high percentage of long-term investors have lower volatility. But, they point out, Bushee did not examine whether short- or long-term shareholder groups have any impact on price levels or long-term corporate profitability.
“Others argue that a company’s investment horizon is more likely to be influenced by the design of its executive compensation program (the mix of long- and short-term, fixed and at-risk incentives offered to management) than the investment horizon of shareholders,” Beyer, Larcker and Tayan say. “Shareholder investment horizon might influence the company’s investment horizon (the number of years a company is willing to wait until a project becomes profitable) by exerting pressure on the board to alter the incentive structure offered to management.”
So, it seems all this talk of short-term vs long-term investors might just be a lot of hot air that doesn’t actually matter to stock price, the investing equivalent of people who still believe being cold will give you a cold. What do you think? Do you still prefer long-term investors over short-term investors?