Capital Markets and Short-Termism: Evidence from the Investment Behavior of Public and Private Firms.

We show that, contrary to popular belief, capital markets do not drive short-termism. By comparing public and private European firms in countries with different institutional infrastructures, we show that being listed in the stock market plays a positive role in a firm’s investment policies, which is inconsistent with the notion of short-termism. Additionally, the degree to which public markets encourage investment varies positively with countries’ institutional quality. We reconcile the differences between our findings and large sample U.S. results by showing that highly leveraged firms are over-represented in Sageworks’ U.S. private firm data.