Investor horizons and corporate policies under uncertainty

Abstract

Investors are not a homogeneous group. They comprise a broad spectrum of shareholders who differ, among other things, in terms of their investment horizon. While investors with a short investment horizon want to maximize current stock prices, as they expect to exit their positions soon, longterm investors seek to maximize the present value of future cash flows (e.g., Gaspar et al., 2004; Stein, 1996). In recent decades, researchers have begun focusing on distinguishing between shareholders in this manner, particularly in the context of CEO remuneration (Bolton et al., 2005, 2006; Cadman & Sunder, 2014) and monitoring of managers (Chen et al., 2007; Gaspar et al., 2005). Another highly debated topic, because of its growing international prominence, is uncertainty. Following major shocks, including the 9/11 terrorist attacks, the 2007/2008 global financial crisis, the Brexit referendum, and most recently, the COVID19 pandemic, uncertainty tends to rise sharply (see Altig et al., 2020; Bloom, 2014; Hill et al., 2019). Empirical evidence shows that uncertainty can have strong adverse effects on various corporate policies, such as capital expenditures (Gulen & Ion, 2016; Julio & Yook, 2012; Kang et al., 2014; Kim & Kung, 2017), employment growth (Baker et al., 2016; Bloom, 2009; Stein & Stone, 2013), and share repurchases (Pirgaip & Dinçergök, 2019). However, the extant literature does not examine if these uncertainty– corporate policy relationships are a function of shareholder horizons. This study aims to bridge this gap by focusing on annual firmlevel Investment, Employment, and Share repurchase decisions as key corporate policies. Investment rates and employment growth are key indicators of the real economy (Baker et al., 2016), which provide a sensible outlook on future expectations. As with capitalintensive share buybacks, they are similarly dependent on assumptions about future business conditions (Pirgaip & Dinçergök, 2019). We specifically refrain from examining dividend payments because they are considered sticky and thus relatively stable over time (Lintner, 1956), while share repurchases are Received: 7 September 2020 | Revised: 16 January 2021 | Accepted: 19 February 2021 DOI: 10.1002/rfe.1129