Should Short-Term Shareholders Have Less Rights?

Abstract

Public officials, business leaders, and academics have expressed concerned that allowing investors with short-term investment horizon to initiate and vote on changes in the governance of public companies can be expected to exacerbate short-termism, and have made influential proposals to eliminate or constrain the shareholder rights of such short-term investors. We develop a model to study whether such proposals could be expected to enhance the long-term value of public companies. To this end, we extend the canonical Stein Model (Stein 1988 and Stein 1989) by allowing for governance structures, pay schemes, and director selection to be determined endogenously and influenced by shareholder preferences. Using this standard framework for analyzing short-termism, we find that governance structures that give rise to some level of corporate myopia can provide benefits to long-term investors that could lead to their adoption even when short-term investors are denied participation rights. Most importantly, we show that short-term investors have the same preferences with respect to governance structures, pay schemes, and director selections as long-term shareholders and, contrary to widely expressed concerns, short-term investors would not prefer choices making long-term shareholders worse-off. Our analysis indicates that the standard economic framework for studying short-termism does not provide a basis for eliminating or weakening the rights of short-term shareholders to participate in the governance of public companies.

Keywords: Corporate Governance, Myopia, Short-termism, Long-Term Investments, Shareholder Rights, Hedge Fund Activism, Dual-Class, Tenure Voting

JEL Classification: D74, D82, D83, G34, K22